UNIVERSITY OF KWAZULU NATAL

AN APPLICATION OF PORTER'S FIVE FORCES MODEL TO DETERMINE THE ATTRACTIVENESS OF A THIRD

PARTY DISTRIBUTOR OF LIFE AND INVESTMENT PRODUCTS.

KIRUBALINGAM SINGARAM PADA Y ACHEE

STUDENT NUMBER: 200501128

Submitted in partial fulfillment of the requirements for the degree of Master of Business Administration

Graduate School of Business, Faculty of Management, University of KwaZulu - Natal

Supervisor: Mr Alec Bozas Co-Supervisor: Mr Robin Martin Challenor

December 2006

UNIVERSITY OF KWAZULU NATAL

AN APPLICATION OF PORTER'S FIVE FORCES MODEL TO DETERMINE THE ATTRACTIVENESS OF A THIRD

PARTY DISTRIBUTOR OF LIFE AND INVESTMENT PRODUCTS.

KIRUBALINGAM SINGARAM PADA Y ACHEE

STUDENT NUMBER: 200501128

Submitted in partial fulfillment of the requirements for the degree of Master of Business Administration

Graduate School of Business, Faculty of Management, University of KwaZulu - Natal

Supervisor: Mr Alec Bozas Co-Supervisor: Mr Robin Martin Challenor

December 2006

2007/12/31

TO WHOM IT MAY CONCERN

RE: CONFIDENTIALITY CLAUSE

Due to the strategic nature of this research it would be appreciated it the contents remains confidential and not be circulated for a period of five/ten years or other specified period.

Sincerely

11

2007/12/31

TO WHOM IT MAY CONCERN

RE: CONFIDENTIALITY CLAUSE

Due to the strategic nature of this research it would be appreciated it the contents remains confidential and not be circulated for a period of five/ten years or other specified period.

Sincerely

11

DECLARATION

This research has not been previously accepted for any degree and is not being currently considered for any other degree at any other university. I declare that this Dissertation contains my own work except where specifically acknowledged.

K.S.Padayachee 200501128

Signed~.,J.. .. . Date . . . .. ~/.~ ...... . .... . . . 1 ! 6093

111

DECLARATION

This research has not been previously accepted for any degree and is not being currently considered for any other degree at any other university. I declare that this Dissertation contains my own work except where specifically acknowledged.

K.S.Padayachee 200501128

Signed~.,J.. .. . Date . . . .. ~/.~ ...... . .... . . . 1 ! 6093

111

ACKNOWLEDGEMENTS

"No undertaking of a project as intense as this study is possible without the contribution of many people. It is not possible to single out all those who offered support and encouragement during what at times seemed to be 'a never ending journey'. However, there are individuals without whom this project would not have been completed, and to them go my special thanks and acknowledgement of their contributions.

Firstly, I am indebted to my supervisor, Mr. Alec Bozas who ensured that this project was completed and that all deadlines were met. I am deeply indebted to him for the uncompromising faith that he showed in the successful completion ofthis project.

Secondly, I want to thank my wife for the ongoing support and confidence that she gave me to bring this proj ect to a successful end. I want to also thank her and my son Kumran for giving me all the time that I needed to work on this project. Thank you for your love and dedication.

Thirdly, to my parents for the inspiration that they give me to continually excel at all my tasks. Thank you for being part of my life in every thing that I do.

Finally, to the lord of my understanding for the quiet inspiration and strength that you showed me when the 'going got though' . I thank you and will always remain your loyal servant".

IV

ACKNOWLEDGEMENTS

"No undertaking of a project as intense as this study is possible without the contribution of many people. It is not possible to single out all those who offered support and encouragement during what at times seemed to be 'a never ending journey'. However, there are individuals without whom this project would not have been completed, and to them go my special thanks and acknowledgement of their contributions.

Firstly, I am indebted to my supervisor, Mr. Alec Bozas who ensured that this project was completed and that all deadlines were met. I am deeply indebted to him for the uncompromising faith that he showed in the successful completion ofthis project.

Secondly, I want to thank my wife for the ongoing support and confidence that she gave me to bring this proj ect to a successful end. I want to also thank her and my son Kumran for giving me all the time that I needed to work on this project. Thank you for your love and dedication.

Thirdly, to my parents for the inspiration that they give me to continually excel at all my tasks. Thank you for being part of my life in every thing that I do.

Finally, to the lord of my understanding for the quiet inspiration and strength that you showed me when the 'going got though' . I thank you and will always remain your loyal servant".

IV

AN APPLICATION OF PORTER'S FIVE FORCES MODEL TO DETERMINE THE ATTRACTIVENESS OF A THIRD PARTY

DISTRIBUTOR OF LIFE AND INVESTMENT PRODUCTS.

ABSTRACT

The research centred around the fact that the existing methods of distributing life and investment products was inefficient and it was decided to research the issue to determine whether a more suitable cost effective method could be developed. Currently the distribution of life and investment products is very expensive and therefore an alternate method of distribution was being explored. This was also endorsed in a survey conducted by the Financial Services Board were it was found that in order for financial services company to survive and compete new models need to be developed to compete in this increasingly globalised industry.

Life assurance and investment products in South Africa and elsewhere in the world is sold by agents who are employed by the life assurance and investment companies. More recently other distribution channels have emerged and these include the internet, direct mail and call centres. The share of business that is obtained through these means is also an interesting feature to explore when investigating the methods used by new entrants to this multi billion rand industry.

The situation prevailing in the local industry is that independent brokers secures a contract with the life company's and this places the broker in a position to market the company's products through the use of business consultants. There are significant costs associated with the current model of distributing the companies' products. These are broker consultant salaries, car allowances and traveling expenses, entertainment expenses, overriding commission on the business sold by the broker they servIce, management and support staff expenses and related expenses.

The proposed model will have following characteristics. • Have distribution contracts with all independent brokers. • Using the franchise methods of training and recruiting business consultants. • Variable costing methods in determining payments for service delivered. • This method would also significantly reduce the cost of distribution by the new

entrants into this multi billion rand industry.

In the final analysis it was shown that the third party distributor would make a difference to the manner in which life and investments products is distributed in this dynamically changing industry.

v

AN APPLICATION OF PORTER'S FIVE FORCES MODEL TO DETERMINE THE ATTRACTIVENESS OF A THIRD PARTY

DISTRIBUTOR OF LIFE AND INVESTMENT PRODUCTS.

ABSTRACT

The research centred around the fact that the existing methods of distributing life and investment products was inefficient and it was decided to research the issue to determine whether a more suitable cost effective method could be developed. Currently the distribution of life and investment products is very expensive and therefore an alternate method of distribution was being explored. This was also endorsed in a survey conducted by the Financial Services Board were it was found that in order for financial services company to survive and compete new models need to be developed to compete in this increasingly globalised industry.

Life assurance and investment products in South Africa and elsewhere in the world is sold by agents who are employed by the life assurance and investment companies. More recently other distribution channels have emerged and these include the internet, direct mail and call centres. The share of business that is obtained through these means is also an interesting feature to explore when investigating the methods used by new entrants to this multi billion rand industry.

The situation prevailing in the local industry is that independent brokers secures a contract with the life company's and this places the broker in a position to market the company's products through the use of business consultants. There are significant costs associated with the current model of distributing the companies' products. These are broker consultant salaries, car allowances and traveling expenses, entertainment expenses, overriding commission on the business sold by the broker they servIce, management and support staff expenses and related expenses.

The proposed model will have following characteristics. • Have distribution contracts with all independent brokers. • Using the franchise methods of training and recruiting business consultants. • Variable costing methods in determining payments for service delivered. • This method would also significantly reduce the cost of distribution by the new

entrants into this multi billion rand industry.

In the final analysis it was shown that the third party distributor would make a difference to the manner in which life and investments products is distributed in this dynamically changing industry.

v

Description

Title page

Confidentiality Clause

Declaration

Acknowledgements

Abstract

Table of Contents

List of Tables

List of Figures

TABLE OF CONTENTS

VI

Pages

I

11

111

IV

V

Vll

XlI

X111

Description

Title page

Confidentiality Clause

Declaration

Acknowledgements

Abstract

Table of Contents

List of Tables

List of Figures

TABLE OF CONTENTS

VI

Pages

I

11

111

IV

V

Vll

XlI

X111

TABLE OF CONTENTS

TITLE PAGE

1. Introduction

1.1 Introduction 1

1.2 Value of Research 8

1.3 Objective of the Research 9

1.4 Limitation of the Study 10

1.5 Research Methodology 11

1.6 Structure of the Research 12

1.7 Summary 13

2. Literature Review 14

2.1 Introduction 14

2.2 Overview of the Five Forces Model 14

2.3 The Five Forces Framework 17

2.3.1 Threat of Entry 18

2.3.2 Power of Suppliers 21

2.3.3 Power of Buyers 26

2.3.4 Threat of Substitutes 31

2.3.5 Competitive Rivalry 31

2.4 Summary 33

vu

TABLE OF CONTENTS

TITLE PAGE

1. Introduction

1.1 Introduction 1

1.2 Value of Research 8

1.3 Objective of the Research 9

1.4 Limitation of the Study 10

1.5 Research Methodology 11

1.6 Structure of the Research 12

1.7 Summary 13

2. Literature Review 14

2.1 Introduction 14

2.2 Overview of the Five Forces Model 14

2.3 The Five Forces Framework 17

2.3.1 Threat of Entry 18

2.3.2 Power of Suppliers 21

2.3.3 Power of Buyers 26

2.3.4 Threat of Substitutes 31

2.3.5 Competitive Rivalry 31

2.4 Summary 33

vu

3. Research Methodology 34

3.1 Introduction 34

3.2 Research Process 34

3.3 Pilot Study 36

3.4 Interviews 37

3.5 Ethical Issues 38

3.6 Problems Experienced 38

3.7 Positive Experiences 39

3.8 Conclusion 40

4. Data Collection and Analysis 41

4.1 Introduction 41

4.2 Industry Boundaries 42

4.3 Threat of Entry 43

4.3.1 Source of New Entry 43

4.3.1.1 Related Product Markets 44

4.3.1.2 Firms Up and Down the Value Chain 47

4.3.1.3 Firms with Related Competencies 49

4.3.2.1 Economies of Scale 52

4.3.2.2 Branding 52

4.3.2.3 Switching Costs 53

4.3.2.4 Access to Distribution 54

4.3.2.5 Expected Retaliation 55

Vlll

3. Research Methodology 34

3.1 Introduction 34

3.2 Research Process 34

3.3 Pilot Study 36

3.4 Interviews 37

3.5 Ethical Issues 38

3.6 Problems Experienced 38

3.7 Positive Experiences 39

3.8 Conclusion 40

4. Data Collection and Analysis 41

4.1 Introduction 41

4.2 Industry Boundaries 42

4.3 Threat of Entry 43

4.3.1 Source of New Entry 43

4.3.1.1 Related Product Markets 44

4.3.1.2 Firms Up and Down the Value Chain 47

4.3.1.3 Firms with Related Competencies 49

4.3.2.1 Economies of Scale 52

4.3.2.2 Branding 52

4.3.2.3 Switching Costs 53

4.3.2.4 Access to Distribution 54

4.3.2.5 Expected Retaliation 55

Vlll

4.4 Threat of Substitutes 56

4.4.1 Types of Substitutes 56

4.4.1.1 Product-for-Product Substitution 57

4.4.1.2 Substitution of the Need by a New Product or Service 59

4.4.1.3 Generic Substitution 61

4.4.2 Defending against the Threat 61

4.4.2.1 Relative Price- Performance of Substitutes 62

4.2.2.2 Switching Costs 63

4.2.2.3 Buyer Propensity to Substitute 64

4.4.3 Assessing the Extent of the Threat of Substitutes 65

4.5 Summary 66

4.6 Power of Suppliers 67

4.6.1 Characteristics of Supplier Power 68

4.6.1.1 Product Differentiation 68

4.6.1.2 Presence of Substitutes Inputs 69

4.6.1.3 Supplier Concentration 70

4.6.1.4 Importance of Volume to Supplier 71

4.6.1.5 Impact on Inputs 72

4.6.1.6 Threat of Forward Integration 73

4.6.2 Potential for Strategic Collaboration 74

4.7 Power of Buyers 75

4.7.1 Value Creation 76

IX

4.4 Threat of Substitutes 56

4.4.1 Types of Substitutes 56

4.4.1.1 Product-for-Product Substitution 57

4.4.1.2 Substitution of the Need by a New Product or Service 59

4.4.1.3 Generic Substitution 61

4.4.2 Defending against the Threat 61

4.4.2.1 Relative Price- Performance of Substitutes 62

4.2.2.2 Switching Costs 63

4.2.2.3 Buyer Propensity to Substitute 64

4.4.3 Assessing the Extent of the Threat of Substitutes 65

4.5 Summary 66

4.6 Power of Suppliers 67

4.6.1 Characteristics of Supplier Power 68

4.6.1.1 Product Differentiation 68

4.6.1.2 Presence of Substitutes Inputs 69

4.6.1.3 Supplier Concentration 70

4.6.1.4 Importance of Volume to Supplier 71

4.6.1.5 Impact on Inputs 72

4.6.1.6 Threat of Forward Integration 73

4.6.2 Potential for Strategic Collaboration 74

4.7 Power of Buyers 75

4.7.1 Value Creation 76

IX

4.7.2 Characteristics of Buyers 77

4.7.2.1 Buyer Concentration vs. Finn Concentration 77

4.7.2.2 Buyer Volume 77

4.7.2.3 Buyer Switching Costs 78

4.7.2.4 Threat of Backward Integration 79

4.7.2.5 Presence of Substitute Products 79

4.7.2.6 Product Differentiation 80

4.7.2.7 Impact on Quality of Perfonnance 81

4.7.2.8 Impact on Buyer Profits 82

4.8 Summary 83

4.9 Characteristics of Competitive Rivalry 84

4.9.1 Industry Growth 84

4.9.2 Fixed Costs 85

4.9.3 Product Differences 86

4.9.4 Diversity of Competitors 87

4.9.5 Exit Barriers 88

4.10 Summary 89

5. Conclusions and Recommendations 90

5.1 Introduction 90

5.2 Industry Boundaries 92

5.2.1 Research Issues 92

5.3 Threat of Entry 94

x

4.7.2 Characteristics of Buyers 77

4.7.2.1 Buyer Concentration vs. Finn Concentration 77

4.7.2.2 Buyer Volume 77

4.7.2.3 Buyer Switching Costs 78

4.7.2.4 Threat of Backward Integration 79

4.7.2.5 Presence of Substitute Products 79

4.7.2.6 Product Differentiation 80

4.7.2.7 Impact on Quality of Perfonnance 81

4.7.2.8 Impact on Buyer Profits 82

4.8 Summary 83

4.9 Characteristics of Competitive Rivalry 84

4.9.1 Industry Growth 84

4.9.2 Fixed Costs 85

4.9.3 Product Differences 86

4.9.4 Diversity of Competitors 87

4.9.5 Exit Barriers 88

4.10 Summary 89

5. Conclusions and Recommendations 90

5.1 Introduction 90

5.2 Industry Boundaries 92

5.2.1 Research Issues 92

5.3 Threat of Entry 94

x

5.3.1 Findings 95

5.4 The Threat of Substitutes 96

5.4.1 Findings 97

5.5 Power of Suppliers 97

5.5.1 Findings 99

5.6 Power of Buyers 99

5.6.1 Findings 100

5.7 Competitive Rivalry 101

5.8 Conclusion 102

5.9 Shortcomings of the Study 104

5.10 Closing Comments 106

6. References 107

7. Appendices 110

xi

5.3.1 Findings 95

5.4 The Threat of Substitutes 96

5.4.1 Findings 97

5.5 Power of Suppliers 97

5.5.1 Findings 99

5.6 Power of Buyers 99

5.6.1 Findings 100

5.7 Competitive Rivalry 101

5.8 Conclusion 102

5.9 Shortcomings of the Study 104

5.10 Closing Comments 106

6. References 107

7. Appendices 110

xi

LIST OF TABLES

TITLE

4.1 Survey of new entrant

4.2 Survey of broker managers

4.3 Survey of Independent Brokers

4.4 Survey of Broker Managers

4.5 Services that brokers value

4.6 Buyer Switching Costs

XlI

PAGE

42

45

50

51

62

78

LIST OF TABLES

TITLE

4.1 Survey of new entrant

4.2 Survey of broker managers

4.3 Survey of Independent Brokers

4.4 Survey of Broker Managers

4.5 Services that brokers value

4.6 Buyer Switching Costs

XlI

PAGE

42

45

50

51

62

78

LIST OF FIGURES

TITLE PAGE

Fig 1.1 Proposed model on Franchised Distributor 5

Fig 1.2 Share of recurring premium 6

Fig 4.1 Current Distribution Model 43

Fig 4.2 Source of New Entrant 44

Xlll

LIST OF FIGURES

TITLE PAGE

Fig 1.1 Proposed model on Franchised Distributor 5

Fig 1.2 Share of recurring premium 6

Fig 4.1 Current Distribution Model 43

Fig 4.2 Source of New Entrant 44

Xlll

1.1 INTRODUCTION

CHAPTER 1

INTRODUCTION

The researcher, who is employed in the investment industry, perceived that the existing

methods of distributing life and investment products was inefficient and it was decided to

research the issue to determine whether a more suitable cost effective method could be

developed. Currently the distribution of life and investment products is very expensive

and therefore an alternate method of distribution is being explored. This was also

endorsed in a survey conducted by the Financial Services Board were it was found that

in order for fmancial services company to survive and compete new models need to be

developed to compete in this increasingly globalised industry.

Life assurance and investment products in South Africa and elsewhere in the world is

sold by agents who are employed by the life assurance and investment companies. More

recently other distribution channels have emerged and these include the internet, direct

mail and call centres. The share of business that is obtained through these means is also

an interesting feature to explore when investigating the methods used by new entrants to

this multi billion rand industry.

The purpose of the study was to assess the potential of a firm seeking to operate as an

independent distributor of life and investment products in South Africa by applying

Porter's Five Forces Model and industry competitor analysis to the industry in order to

see if the envisaged model on page (4) is appropriate for a company to adopt. The study

1

1.1 INTRODUCTION

CHAPTER 1

INTRODUCTION

The researcher, who is employed in the investment industry, perceived that the existing

methods of distributing life and investment products was inefficient and it was decided to

research the issue to determine whether a more suitable cost effective method could be

developed. Currently the distribution of life and investment products is very expensive

and therefore an alternate method of distribution is being explored. This was also

endorsed in a survey conducted by the Financial Services Board were it was found that

in order for fmancial services company to survive and compete new models need to be

developed to compete in this increasingly globalised industry.

Life assurance and investment products in South Africa and elsewhere in the world is

sold by agents who are employed by the life assurance and investment companies. More

recently other distribution channels have emerged and these include the internet, direct

mail and call centres. The share of business that is obtained through these means is also

an interesting feature to explore when investigating the methods used by new entrants to

this multi billion rand industry.

The purpose of the study was to assess the potential of a firm seeking to operate as an

independent distributor of life and investment products in South Africa by applying

Porter's Five Forces Model and industry competitor analysis to the industry in order to

see if the envisaged model on page (4) is appropriate for a company to adopt. The study

1

also sought to highlight those issues that the independent distributor should pay special

attention to in its efforts t6 build a competitive business. The concept of a franchised

distributor is an entirely new one to the South African market.

The research attempts to investigate the impact of the independent distributor in the life

assurance industry and the new methods of distributing it products through cost effective

methods and thereby increasing the market share of the company. These methods of

distribution are examined by using Porter's Five Forces model.

The situation prevailing in the local industry is that independent brokers secures a

contract with the life company's and this places the broker in a position to market the

company's products through the use of business consultants. There are significant costs

associated with the current model of distributing the companies' products. These broker

consultant salaries, car allowances and travelling expenses, entertainment expenses,

overriding commission on the business sold by the broker they service, management and

support staff expenses and related expenses.

The business consultants are trained by the life companies on their products and various

industry related issues.

The other method is the use of in house sales agents that are trained by the company for

the sole distribution of its products. This method of distribution also helps the life

company to earn revenue through a product-focused initiative.

2

also sought to highlight those issues that the independent distributor should pay special

attention to in its efforts t6 build a competitive business. The concept of a franchised

distributor is an entirely new one to the South African market.

The research attempts to investigate the impact of the independent distributor in the life

assurance industry and the new methods of distributing it products through cost effective

methods and thereby increasing the market share of the company. These methods of

distribution are examined by using Porter's Five Forces model.

The situation prevailing in the local industry is that independent brokers secures a

contract with the life company's and this places the broker in a position to market the

company's products through the use of business consultants. There are significant costs

associated with the current model of distributing the companies' products. These broker

consultant salaries, car allowances and travelling expenses, entertainment expenses,

overriding commission on the business sold by the broker they service, management and

support staff expenses and related expenses.

The business consultants are trained by the life companies on their products and various

industry related issues.

The other method is the use of in house sales agents that are trained by the company for

the sole distribution of its products. This method of distribution also helps the life

company to earn revenue through a product-focused initiative.

2

For companies that use broker consultants and in house agents to distribute its product,

the following costs are incurred:

• Management salaries and related costs.

• Support services.

• Consultant salaries, car allowances, office allowances.

• Training and development costs.

• Seminars and conventions.

The proposed model on page (4) can be used by new entrants into the life and investment

industry. The new model will have following characteristics.

• Have distribution contracts with all independent brokers.

• Using the franchise methods of training and recruiting business consultants.

• Variable costing methods in determining payments for service delivered

This method would significantly reduce the cost of distribution by the new entrants into

this multi billion rand industry. Companies that distribute their products through

traditional methods incur the following costs:

• Medical aid pension and group life cover.

• Office rental, telephone and secretarial allowances.

• Commissions.

• Bonuses for achieving targets.

• Training and developing.

3

For companies that use broker consultants and in house agents to distribute its product,

the following costs are incurred:

• Management salaries and related costs.

• Support services.

• Consultant salaries, car allowances, office allowances.

• Training and development costs.

• Seminars and conventions.

The proposed model on page (4) can be used by new entrants into the life and investment

industry. The new model will have following characteristics.

• Have distribution contracts with all independent brokers.

• Using the franchise methods of training and recruiting business consultants.

• Variable costing methods in determining payments for service delivered

This method would significantly reduce the cost of distribution by the new entrants into

this multi billion rand industry. Companies that distribute their products through

traditional methods incur the following costs:

• Medical aid pension and group life cover.

• Office rental, telephone and secretarial allowances.

• Commissions.

• Bonuses for achieving targets.

• Training and developing.

3

• Seminars and conventions.

Source: Stanlib Regional Manager (2006)

These large financial burdens have begun to threaten the future of established of life

assurance companies. Some insurers had to down scale their current operations in order

to provide policyholder protection. The indications are that such methods of distribution

have become too expensive to sustain, thus affecting the stability of the companies

continued survival.

This being the case, new life assurance companies seized the opportunity to develop new

products which they distributed through privately owned franchises on a fee for service

basis. The results of this methodology have resulted in life assurance companies and

investment companies' spending more time on research and development with more

customer focused products that are more cost effect and provides greater coverage.

The study is intended to show the trends in the changing environment in customer­

focused product developed as part of strategic management, using the theoretical

evaluation methods in strategic management. The Five-Forces Model will also be used in

evaluating the impact of the new entrants and the use of the new distribution methods.

The diagram below was developed by the researcher.

The model below shows the current method of distribution that is used by the Life and

Investment companies to market its products. By using this method agents and brokers

that have distribution agreements with these companies are limited to selling only these

4

• Seminars and conventions.

Source: Stanlib Regional Manager (2006)

These large financial burdens have begun to threaten the future of established of life

assurance companies. Some insurers had to down scale their current operations in order

to provide policyholder protection. The indications are that such methods of distribution

have become too expensive to sustain, thus affecting the stability of the companies

continued survival.

This being the case, new life assurance companies seized the opportunity to develop new

products which they distributed through privately owned franchises on a fee for service

basis. The results of this methodology have resulted in life assurance companies and

investment companies' spending more time on research and development with more

customer focused products that are more cost effect and provides greater coverage.

The study is intended to show the trends in the changing environment in customer­

focused product developed as part of strategic management, using the theoretical

evaluation methods in strategic management. The Five-Forces Model will also be used in

evaluating the impact of the new entrants and the use of the new distribution methods.

The diagram below was developed by the researcher.

The model below shows the current method of distribution that is used by the Life and

Investment companies to market its products. By using this method agents and brokers

that have distribution agreements with these companies are limited to selling only these

4

companies products. This method makes the distribution model more product focussed

rather than it being client focused.

The proposed model of converting the distribution of Life and investment products to a

independent distributor as high-lighted in the envisaged model below will become more

client focussed rather than it being more product focussed. The agents and brokers will be

aligned to the independent distributor will have secured contracts with all servIce

providers in the Life and Investment industry gIVIng them more options to choose

appropriate product offerings to satisfy their clients objectives.

Present Model Proposed Model Example

1

Figure 1.1. Proposed Model on Franchised Distributor (2006)

5

companies products. This method makes the distribution model more product focussed

rather than it being client focused.

The proposed model of converting the distribution of Life and investment products to a

independent distributor as high-lighted in the envisaged model below will become more

client focussed rather than it being more product focussed. The agents and brokers will be

aligned to the independent distributor will have secured contracts with all servIce

providers in the Life and Investment industry gIVIng them more options to choose

appropriate product offerings to satisfy their clients objectives.

Present Model Proposed Model Example

1

Figure 1.1. Proposed Model on Franchised Distributor (2006)

5

This research applies Michael Porters Five Forces Model of the industry and competitor

analysis to firms seeking to operate as an independent third party distributor of life,

investment and related products in South Africa. As can be seen from the above figure

the focus of the study will be on the "Independent Distributor". Porters Five Forces

Model will be used to analysis the analyse the life and Investment industry in order that

after the interview process, suitable recommendations can be made as to whether or not

this proposed model is a suitable alternative to the existing Tied Distribution system.

As noted earlier that the marketing and distribution of life assurance and investment

products are distributed by both agents employed by the life companies and independent

brokers on a contract basis.

More recently other distribution channels have been established to access other markets

in pursuance of increasing the market share of its premium income. The share of business

sold by each channel is depicted below.

60

50

40

30

20

10

o

Figure 1.2. Share of recurring premium

Source: www.LOA.co.za (2006).

6

• Brokers

• Agents

o Direct

This research applies Michael Porters Five Forces Model of the industry and competitor

analysis to firms seeking to operate as an independent third party distributor of life,

investment and related products in South Africa. As can be seen from the above figure

the focus of the study will be on the "Independent Distributor". Porters Five Forces

Model will be used to analysis the analyse the life and Investment industry in order that

after the interview process, suitable recommendations can be made as to whether or not

this proposed model is a suitable alternative to the existing Tied Distribution system.

As noted earlier that the marketing and distribution of life assurance and investment

products are distributed by both agents employed by the life companies and independent

brokers on a contract basis.

More recently other distribution channels have been established to access other markets

in pursuance of increasing the market share of its premium income. The share of business

sold by each channel is depicted below.

60

50

40

30

20

10

o

Figure 1.2. Share of recurring premium

Source: www.LOA.co.za (2006).

6

• Brokers

• Agents

o Direct

The total recurring business sold by these two channels is in the region of R6 billion.

Recurring premium sold by other distribution channels is less than two percent of this

huge market capitalization.

The current business model that is being used by most life and investment companies is

proving to be very expensive and less profitable. There are significant cost associated

with the established methods of distribution and these include basic salary, car

allowances and travelling expenses, entertainment expenses, and overriding commissions

on the business sold by brokers that they service, management and support staff salaries

and related expenses, training, office space and related expenses, seminars for brokers.

The new model envIsages a fee for servIce basis. This will remove the burden of

traditional life and investment companies incurring large fixed expenses in securing its

share of the market. The life and investment company will have distribution contracts

with independently owned third party distributors. This new independent operation will

focus on the distribution of the various companies' products through the broker

consultants that are employed by it. The Life and Investment companies on the other

hand will focus on product development in line with consumer needs. In this relationship

the companies will become the franchisors and the independently owned franchises will

become the franchisee.

The third party distributor would employ the broker consultants who would be trained

and developed on the various companies' product range and also obtain the necessary

7

The total recurring business sold by these two channels is in the region of R6 billion.

Recurring premium sold by other distribution channels is less than two percent of this

huge market capitalization.

The current business model that is being used by most life and investment companies is

proving to be very expensive and less profitable. There are significant cost associated

with the established methods of distribution and these include basic salary, car

allowances and travelling expenses, entertainment expenses, and overriding commissions

on the business sold by brokers that they service, management and support staff salaries

and related expenses, training, office space and related expenses, seminars for brokers.

The new model envIsages a fee for servIce basis. This will remove the burden of

traditional life and investment companies incurring large fixed expenses in securing its

share of the market. The life and investment company will have distribution contracts

with independently owned third party distributors. This new independent operation will

focus on the distribution of the various companies' products through the broker

consultants that are employed by it. The Life and Investment companies on the other

hand will focus on product development in line with consumer needs. In this relationship

the companies will become the franchisors and the independently owned franchises will

become the franchisee.

The third party distributor would employ the broker consultants who would be trained

and developed on the various companies' product range and also obtain the necessary

7

accreditations. Given the fact that this would significantly reduce the costs to the life and

investment companies and the various cost mentioned earlier would be replaced by the

fees paid to the independent distributor as their costs of distribution. This would greatly

enhance the company's capabilities to focus on product development, risk management,

asset management and other areas unrelated to distribution.

1.2 VALUE OF THE RESEARCH

This research is of value to life and investment companies or new entrants considering

establishing a business model along the lines of the current proposition as it will be

demonstrated that the proposed model is more efficient and it will increase profitability

and focus more fully on product development. The consumer will be in a position to

choose products that are more suitable for their needs. The second advantage to the

consumer will be the pricing of the products that will become more favourable and client

centric.

These savings and potentially improved profits through more effective sales should

encourage the life and investment companies to seek to operate in an environment that

will increase profitability and focus more fully on product development.

The research should provide others engaged in the distribution of life and investment

products with additional insights into the distribution of its products and the competitive

forces that shape it.

8

accreditations. Given the fact that this would significantly reduce the costs to the life and

investment companies and the various cost mentioned earlier would be replaced by the

fees paid to the independent distributor as their costs of distribution. This would greatly

enhance the company's capabilities to focus on product development, risk management,

asset management and other areas unrelated to distribution.

1.2 VALUE OF THE RESEARCH

This research is of value to life and investment companies or new entrants considering

establishing a business model along the lines of the current proposition as it will be

demonstrated that the proposed model is more efficient and it will increase profitability

and focus more fully on product development. The consumer will be in a position to

choose products that are more suitable for their needs. The second advantage to the

consumer will be the pricing of the products that will become more favourable and client

centric.

These savings and potentially improved profits through more effective sales should

encourage the life and investment companies to seek to operate in an environment that

will increase profitability and focus more fully on product development.

The research should provide others engaged in the distribution of life and investment

products with additional insights into the distribution of its products and the competitive

forces that shape it.

8

1.3 THE OBJECTIVE OF THE RESEARCH

The research will high-light areas that the Life assurers need to focus on, in order to build

competitive, sustainable businesses. The core objective of this study is to explore the

potential application of the Five Forces Model to the life and investment industry as far

as a distributor is concerned, in the hope that by using the Five Forces model and by

holding in-depth interviews with senior people in the industry, the independent distributor

can become part of a company's distribution system to take it product to the consumer.

The Five Forces Model comprises the following with respect to the Life and Investment

industry in South Africa-

• The entry of new competitors

• The bargaining power of suppliers

• The bargaining power of buyers

• The threat of substitutes

• Competitive rivalry

The proposed model as envisaged on page (5) will be considered using Porters Five

Forces Model in the Life and Investment industry with respect to the objectives of the

9

1.3 THE OBJECTIVE OF THE RESEARCH

The research will high-light areas that the Life assurers need to focus on, in order to build

competitive, sustainable businesses. The core objective of this study is to explore the

potential application of the Five Forces Model to the life and investment industry as far

as a distributor is concerned, in the hope that by using the Five Forces model and by

holding in-depth interviews with senior people in the industry, the independent distributor

can become part of a company's distribution system to take it product to the consumer.

The Five Forces Model comprises the following with respect to the Life and Investment

industry in South Africa-

• The entry of new competitors

• The bargaining power of suppliers

• The bargaining power of buyers

• The threat of substitutes

• Competitive rivalry

The proposed model as envisaged on page (5) will be considered using Porters Five

Forces Model in the Life and Investment industry with respect to the objectives of the

9

study, namely to investigate a more effective and efficient means of distribution of

products for the industry.

The objectives of the study are:

The core objective of this study is to investigate the independent distribution and sales of

Life and Investment products, and to determine whether a more effective method and

model can be developed.

The researcher was also considering the cost implication that companies incur concerning

their sales force.

1.4 LIMITATIONS OF THE STUDY

Limitation one, was the reluctance of the life companies to fully disclose the actual costs

incurred in operating traditional distribution systems versus a third party distribution.

This information will be sourced to through broker managers and agency managers of life

assurance comparues.

Another limitation was the non-availability of current sources of information in the form

of articles and studies on this topic in the last four to five years. The information that was

used in the study was sourced from websites and journal articles. This is due to the fact

that the industry players have been focussing on the regulatory issues.

A further limitation to the study is the fact that it confmes itself to the Five Forces Model

and competitor analysis, however it is through this framework that the future strategy for

10

study, namely to investigate a more effective and efficient means of distribution of

products for the industry.

The objectives of the study are:

The core objective of this study is to investigate the independent distribution and sales of

Life and Investment products, and to determine whether a more effective method and

model can be developed.

The researcher was also considering the cost implication that companies incur concerning

their sales force.

1.4 LIMITATIONS OF THE STUDY

Limitation one, was the reluctance of the life companies to fully disclose the actual costs

incurred in operating traditional distribution systems versus a third party distribution.

This information will be sourced to through broker managers and agency managers of life

assurance comparues.

Another limitation was the non-availability of current sources of information in the form

of articles and studies on this topic in the last four to five years. The information that was

used in the study was sourced from websites and journal articles. This is due to the fact

that the industry players have been focussing on the regulatory issues.

A further limitation to the study is the fact that it confmes itself to the Five Forces Model

and competitor analysis, however it is through this framework that the future strategy for

10

the distribution of life and investment products could be developed. The proposed

solutions will include an analysis of the political, economic, social and technological

environments in financial services.

1.5 RESEARCH METHODOLOGY

To demonstrate the viability of the third party distribution of life and investment products

as envisaged in the model on page (5), the research will seek to obtain the inputs of range

key stakeholders in the life and investment industry. A questionnaire detailing the issues

relating to the distribution of life and investment products will be discussed with

independent brokers and broker managers across KwaZulu-Natal, Cape Town and

Johannesburg. The interviews will be conducted on a face- to- face basis and the results

of this will be used in conjunction with the theoretical framework as envisaged by

Porter's Five Forces' Model. The brokers as well as broker managers that will be targeted

will be spread across the spectrum of service providers within the KwaZulu-Natal, Cape

Town and Johannesburg. The criteria in the target population will be those managers and

brokers that have the Financial Planning Institute (FPI) accreditation and who have more

that five years experience in the life and investment industry.

In addition to the above qualitative research, meetings will be held with FinanzPlan SA, a

brokerage based in Cape who have commenced trading as a third party distributor of risk

products. The methodology that they employ will be ascertained to corroborate the

viability of a third party distributor in the life and investment industry. Their experiences

11

the distribution of life and investment products could be developed. The proposed

solutions will include an analysis of the political, economic, social and technological

environments in financial services.

1.5 RESEARCH METHODOLOGY

To demonstrate the viability of the third party distribution of life and investment products

as envisaged in the model on page (5), the research will seek to obtain the inputs of range

key stakeholders in the life and investment industry. A questionnaire detailing the issues

relating to the distribution of life and investment products will be discussed with

independent brokers and broker managers across KwaZulu-Natal, Cape Town and

Johannesburg. The interviews will be conducted on a face- to- face basis and the results

of this will be used in conjunction with the theoretical framework as envisaged by

Porter's Five Forces' Model. The brokers as well as broker managers that will be targeted

will be spread across the spectrum of service providers within the KwaZulu-Natal, Cape

Town and Johannesburg. The criteria in the target population will be those managers and

brokers that have the Financial Planning Institute (FPI) accreditation and who have more

that five years experience in the life and investment industry.

In addition to the above qualitative research, meetings will be held with FinanzPlan SA, a

brokerage based in Cape who have commenced trading as a third party distributor of risk

products. The methodology that they employ will be ascertained to corroborate the

viability of a third party distributor in the life and investment industry. Their experiences

11

in the setup of their business and the securing of contracts with the many life and

investment companies will be incorporated in this study.

The Independent Financial Adviser (IF A) network, which has commenced business with

a limited offering in Johannesburg, will also be targeted to test the viability of an

independent distributor in the life and investment industry. These discussions were used

to assess the response of the life and investment companies to the new intervention in an

industry that they have dominated for over 60 years.

1.6 STRUCTURE OF THE RESEARCH

• Chapter one is an outline of the research problem, the objectives and an overview

of how the work will be undertaken.

• Chapter two consists of the literature review.

• Chapter three explains the research methodology and data from the fieldwork is

contained in chapter four.

• The final chapter consists of the conclusions and recommendations together with

a proposed model for the distribution of products for the life and investment

industry. In addition recommendations are made for further research.

An overview of the Five Forces Model will be undertaken before discussing each in

detail, with relevance to the life and investment industry. The results from the

questionnaire will be applied to each component of the model and its attractiveness will

be assessed.

12

in the setup of their business and the securing of contracts with the many life and

investment companies will be incorporated in this study.

The Independent Financial Adviser (IF A) network, which has commenced business with

a limited offering in Johannesburg, will also be targeted to test the viability of an

independent distributor in the life and investment industry. These discussions were used

to assess the response of the life and investment companies to the new intervention in an

industry that they have dominated for over 60 years.

1.6 STRUCTURE OF THE RESEARCH

• Chapter one is an outline of the research problem, the objectives and an overview

of how the work will be undertaken.

• Chapter two consists of the literature review.

• Chapter three explains the research methodology and data from the fieldwork is

contained in chapter four.

• The final chapter consists of the conclusions and recommendations together with

a proposed model for the distribution of products for the life and investment

industry. In addition recommendations are made for further research.

An overview of the Five Forces Model will be undertaken before discussing each in

detail, with relevance to the life and investment industry. The results from the

questionnaire will be applied to each component of the model and its attractiveness will

be assessed.

12

1.7 SUMMARY

The industry method of selling policies has been shown, and the proposed franchise

model of distributing life and investment products been shown. This method will be

discussed in the subsequent chapters.

The research will first present a frame of the model itself, which will then be used in

analyzing the financial data gathered during the research in order to arrive at the

conclusion and recommendations.

This chapter has presented the problem and how it will be researched. The following

chapter covers the review of the literature.

13

1.7 SUMMARY

The industry method of selling policies has been shown, and the proposed franchise

model of distributing life and investment products been shown. This method will be

discussed in the subsequent chapters.

The research will first present a frame of the model itself, which will then be used in

analyzing the financial data gathered during the research in order to arrive at the

conclusion and recommendations.

This chapter has presented the problem and how it will be researched. The following

chapter covers the review of the literature.

13

2.1 INTRODUCTION

CHAPTER 2

LITERATURE REVIEW

In this chapter an overview of the Five Forces Model and a discussion of how these

competitive forces will shape the proposed strategy will follow. Some components of the

Five Forces Model may be more applicable to other industries than others (Pearce and

Robinson, 1997) and where appropriate, additional focus will be spent on those forces

that are determined to be of greater importance to the industry under review.

2.2 OVERVIEW OF THE FIVE FORCES MODEL

Michael Porter (1985) states, "Competitive strategy IS the search for a favourable

competitive position in an industry, the fundamental arena in which competition occurs".

He further contends "competitive strategy aims to establish a profitable and sustainable

position against the forces that determine industry competition". Porter also alludes to

the two central issues underpinning competitive strategy, the first of which is the industry

attractiveness, in relation to which he comments "not all industries offer equal

opportunities for sustained profitability", whilst the second is the determinants of the

relative competitive position within an industry, which he demonstrates by reflecting that

some firms within an industry earn more profits than others. Porter emphasizes that both

these issues are central in guiding a firm in its strategy formulation, as a firm that has not

positioned itself well in an attractive industry is not likely to earn attractive profits.

14

2.1 INTRODUCTION

CHAPTER 2

LITERATURE REVIEW

In this chapter an overview of the Five Forces Model and a discussion of how these

competitive forces will shape the proposed strategy will follow. Some components of the

Five Forces Model may be more applicable to other industries than others (Pearce and

Robinson, 1997) and where appropriate, additional focus will be spent on those forces

that are determined to be of greater importance to the industry under review.

2.2 OVERVIEW OF THE FIVE FORCES MODEL

Michael Porter (1985) states, "Competitive strategy IS the search for a favourable

competitive position in an industry, the fundamental arena in which competition occurs".

He further contends "competitive strategy aims to establish a profitable and sustainable

position against the forces that determine industry competition". Porter also alludes to

the two central issues underpinning competitive strategy, the first of which is the industry

attractiveness, in relation to which he comments "not all industries offer equal

opportunities for sustained profitability", whilst the second is the determinants of the

relative competitive position within an industry, which he demonstrates by reflecting that

some firms within an industry earn more profits than others. Porter emphasizes that both

these issues are central in guiding a firm in its strategy formulation, as a firm that has not

positioned itself well in an attractive industry is not likely to earn attractive profits.

14

Similarly, a well-positioned firm in an industry that is not very attractive or one that does

not offer high profits may also be unable to generate attractive profits.

Given that industry attractiveness is the first fundamental decider of a firm's profitability

(Porter, 1985), and that the ultimate aim of competitive strategy is to cope with and shape

the rules that govern competition within and determine the attractiveness of the industry,

it becomes critical to understand the forces in which such rules are embodied. The Five

Forces Model is defined by Johnson and Scholes (2003) as the "means of identifying the

forces which affect the level of competition in an industry, and which might thus help

managers to identify bases of competitive strategy' .

Porter lists the following as the forces, whose collective strength determines the ability of

the firms in an industry to earn on average, returns that exceed their cost of capital:

• The entry of new competitors

• The bargaining power of suppliers

• The bargaining power of buyers

• The threat of substitutes

• Competitive rivalry

Pearce and Robinson (2003) state, "the collective strength of these forces determines the

ultimate profit potential of an industry." Pearce and Robinson (2003) suggest that in order

to be profitability on a sustained basis, a firm must understand how these contending

forces work in an industry, and how they affect the firm in its particular situation.

15

Similarly, a well-positioned firm in an industry that is not very attractive or one that does

not offer high profits may also be unable to generate attractive profits.

Given that industry attractiveness is the first fundamental decider of a firm's profitability

(Porter, 1985), and that the ultimate aim of competitive strategy is to cope with and shape

the rules that govern competition within and determine the attractiveness of the industry,

it becomes critical to understand the forces in which such rules are embodied. The Five

Forces Model is defined by Johnson and Scholes (2003) as the "means of identifying the

forces which affect the level of competition in an industry, and which might thus help

managers to identify bases of competitive strategy' .

Porter lists the following as the forces, whose collective strength determines the ability of

the firms in an industry to earn on average, returns that exceed their cost of capital:

• The entry of new competitors

• The bargaining power of suppliers

• The bargaining power of buyers

• The threat of substitutes

• Competitive rivalry

Pearce and Robinson (2003) state, "the collective strength of these forces determines the

ultimate profit potential of an industry." Pearce and Robinson (2003) suggest that in order

to be profitability on a sustained basis, a firm must understand how these contending

forces work in an industry, and how they affect the firm in its particular situation.

15

From the foregoing, it is evident that the model recognises that competition is manifested

not only in the other firms within a particular industry, but has its roots in the underlying

economics of the industry (Pearce and Robinson, 2003) or the industry structures (Porter,

1985). Therefore customers', suppliers, potential entrants and substitutes are all

competitors in a sense, and some or all may contribute to the profitability of an industry,

depending on the industry (Pearce and Robinson, 2003).

Porter argues that the five forces model determines industry profitability because they

directly influence the elements of return on investment in an industry viz. Prices, cost,

and capital investments. It will be seen, for example, that prices of the firm's offerings

will be influenced by the power or constrained by the threat of substitute products.

Similarly, the costs of the input materials will be influenced by the power of suppliers

whilst the threat of new entrants to the market shapes the amount of the investment that is

required (Porter, 1985).

Whilst it is true that the collective strength of the five forces model determine the profit

potential of an industry (Porter, 1985; Pearce and Robinson, 1997), it bears reference that

different forces take on varying degrees of importance in different industries (Porter,

1985) and hence, "the strongest competitive force or forces determine the profitability of

an industry and so are of greatest importance in strategy formulation" (Pearce and

Robinson, 1985).

16

From the foregoing, it is evident that the model recognises that competition is manifested

not only in the other firms within a particular industry, but has its roots in the underlying

economics of the industry (Pearce and Robinson, 2003) or the industry structures (Porter,

1985). Therefore customers', suppliers, potential entrants and substitutes are all

competitors in a sense, and some or all may contribute to the profitability of an industry,

depending on the industry (Pearce and Robinson, 2003).

Porter argues that the five forces model determines industry profitability because they

directly influence the elements of return on investment in an industry viz. Prices, cost,

and capital investments. It will be seen, for example, that prices of the firm's offerings

will be influenced by the power or constrained by the threat of substitute products.

Similarly, the costs of the input materials will be influenced by the power of suppliers

whilst the threat of new entrants to the market shapes the amount of the investment that is

required (Porter, 1985).

Whilst it is true that the collective strength of the five forces model determine the profit

potential of an industry (Porter, 1985; Pearce and Robinson, 1997), it bears reference that

different forces take on varying degrees of importance in different industries (Porter,

1985) and hence, "the strongest competitive force or forces determine the profitability of

an industry and so are of greatest importance in strategy formulation" (Pearce and

Robinson, 1985).

16

Thus, the strategist wishing to position his fIrm effectively must understand the

importance and underlying economic and technical characteristics of those forces shaping

the competitive environment in his industry (Pearce and Robinson, 1985). However, it is

of relevance that the fIrm is not necessarily a prisoner of its industry structure, and

through the strategic choices that they make, fIrms can influence the fIve forces

governing their industry and can accordingly alter an industry's attractiveness (Porter,

1985).

2.3 THE FIVE FORCES FRAMEWORK

Pearce and Robinson (2003) suggest that regardless of the collective strength of the fIve

forces, the objective of the strategist remains that of fmding a position in the industry,

where his fIrm can best defend itself against these forces or influence them in its favour.

They add further that in order to accomplish this, the strategist must go beyond what is

immediately apparent, and analyse the sources of competition, or the underlying

economic and technical characteristics of each force. A fuller discussion of each force

becomes essential in order that the dynamics underlying that force be understood more

intimately. Moreover, such understanding would allow the strategist to identify the

relevance or strength of each force to his industry and would, accordingly, facilitate his

desire to position his fIrm optimally.

It bears reference that "the Five Forces framework does not eliminate the need for

creativity in fInding new ways of competing in the industry. Instead, it directs managers '

creative energies towards those aspects of industry structure that are most important to

long-run profItability" (Porter, 1985). Indeed, in identifying and understanding those

17

Thus, the strategist wishing to position his fIrm effectively must understand the

importance and underlying economic and technical characteristics of those forces shaping

the competitive environment in his industry (Pearce and Robinson, 1985). However, it is

of relevance that the fIrm is not necessarily a prisoner of its industry structure, and

through the strategic choices that they make, fIrms can influence the fIve forces

governing their industry and can accordingly alter an industry's attractiveness (Porter,

1985).

2.3 THE FIVE FORCES FRAMEWORK

Pearce and Robinson (2003) suggest that regardless of the collective strength of the fIve

forces, the objective of the strategist remains that of fmding a position in the industry,

where his fIrm can best defend itself against these forces or influence them in its favour.

They add further that in order to accomplish this, the strategist must go beyond what is

immediately apparent, and analyse the sources of competition, or the underlying

economic and technical characteristics of each force. A fuller discussion of each force

becomes essential in order that the dynamics underlying that force be understood more

intimately. Moreover, such understanding would allow the strategist to identify the

relevance or strength of each force to his industry and would, accordingly, facilitate his

desire to position his fIrm optimally.

It bears reference that "the Five Forces framework does not eliminate the need for

creativity in fInding new ways of competing in the industry. Instead, it directs managers '

creative energies towards those aspects of industry structure that are most important to

long-run profItability" (Porter, 1985). Indeed, in identifying and understanding those

17

forces that are critical to competition, the framework allows the strategist to identify

those strategic innovations that would add the most to its firm's profitability.

Each force will now be discussed individually.

2.3.1 THREAT OF ENTRY

Porter (1985) suggests "the threat of entry determines the likelihood that new firms will

enter an industry and compete away the value, either passing it on to buyers in the form

of lower prices or dissipating it by raising the costs of competing."

A cursory understanding of basic micro economics would generally be sufficient to

demonstrate that in markets where firms make abnormal profits, new firms are likely to

be attracted to and therefore enter that market, which in turn places pressure on prices and

has the long term effect of reducing all firms in that industry to a level where they can

only earn normal profits (in the long run). Such a theory does assume, of course, that

firms operate under conditions of perfect competition.

Hence, it follows that, in the first instance, the threat of entry assumes conditions of

perfect competition, whilst firms already within the industry and seeking to reduce such a

threat, would wish to create inter alia conditions of imperfect competition, under which

they may continue to earn abnormal profits in the long run.

18

forces that are critical to competition, the framework allows the strategist to identify

those strategic innovations that would add the most to its firm's profitability.

Each force will now be discussed individually.

2.3.1 THREAT OF ENTRY

Porter (1985) suggests "the threat of entry determines the likelihood that new firms will

enter an industry and compete away the value, either passing it on to buyers in the form

of lower prices or dissipating it by raising the costs of competing."

A cursory understanding of basic micro economics would generally be sufficient to

demonstrate that in markets where firms make abnormal profits, new firms are likely to

be attracted to and therefore enter that market, which in turn places pressure on prices and

has the long term effect of reducing all firms in that industry to a level where they can

only earn normal profits (in the long run). Such a theory does assume, of course, that

firms operate under conditions of perfect competition.

Hence, it follows that, in the first instance, the threat of entry assumes conditions of

perfect competition, whilst firms already within the industry and seeking to reduce such a

threat, would wish to create inter alia conditions of imperfect competition, under which

they may continue to earn abnormal profits in the long run.

18

Geroski (1999) offers two important lessons on the issue of new firms entering a market,

the first of which is that successful market entry occurs due to product or process

innovation, together with sound business planning, and the second that incumbent firms

are frequently surprised by the onset of new entrants, because of their preoccupation with

themselves and their activities.

Geroski (1999) also reasons that new entrants are likely to come from certain identifiable

arrears, viz. firms operating in related product markets, firms that are either up or down

the value chain and firms with related competencies.

Firms operating in related product markets are potential entrants largely as a result of

their understanding of the needs of the sane customers, given that they are present in the

same markets (Geroski, 1999). Moreover, this presence also places them in a position

where they are able to identify potential opportunities and finally, given that fact that they

are already established in the same market, albeit with a different product, they already

enjoy brand recognition and customer trust.

Firms that are either up or down the value chain are in a very similar position as those in

related product markets in terms of understanding of customers, access to information,

ability to spot opportunities and brand recognition, and hence, pose a similar threat of

entry (Geroski, 1999).

Finally, firms with related competencies also present a threat of entry, largely as a result

of their ability to use those competencies in different industries.

19

Geroski (1999) offers two important lessons on the issue of new firms entering a market,

the first of which is that successful market entry occurs due to product or process

innovation, together with sound business planning, and the second that incumbent firms

are frequently surprised by the onset of new entrants, because of their preoccupation with

themselves and their activities.

Geroski (1999) also reasons that new entrants are likely to come from certain identifiable

arrears, viz. firms operating in related product markets, firms that are either up or down

the value chain and firms with related competencies.

Firms operating in related product markets are potential entrants largely as a result of

their understanding of the needs of the sane customers, given that they are present in the

same markets (Geroski, 1999). Moreover, this presence also places them in a position

where they are able to identify potential opportunities and finally, given that fact that they

are already established in the same market, albeit with a different product, they already

enjoy brand recognition and customer trust.

Firms that are either up or down the value chain are in a very similar position as those in

related product markets in terms of understanding of customers, access to information,

ability to spot opportunities and brand recognition, and hence, pose a similar threat of

entry (Geroski, 1999).

Finally, firms with related competencies also present a threat of entry, largely as a result

of their ability to use those competencies in different industries.

19

Given the understanding of where new entrants are likely to come from, Geroski (1999)

also provides suggested ways of identifying probable or possible entrants. These include

following the flow of valuable information outward from the market, which would assist

in identifying those companies in nearby markets who may know or have an

understanding of the same customers or be familiar with parts of the firm's value chain;

considering firms with especially relevant capabilities and assessing whether these

capabilities can be profitability applied in the industry concerned. Geroski (1999) also

acknowledges that market entry as a result of a related competency is arguably the most

difficult to anticipate, and suggests therefore that the analyst remain sensitive to this

difficulty, in order that he not overlook it completely.

Geroski (1999) recommends further that answenng the following questions would

facilitate the identification of firms who are likely entrants:

• What are the key competencies that an entrant will need to enter the market?

• Who is likely to possess such competencies?

• What observable actions do they have to take as to assemble the skills and assets

that they will need?

Assuming that the strategist is able to identify the potential entrants to the market, he

would need to pursue some course of action that would allow the finn to defend itself

against this threat. Porter (1985) lists the following underlying characteristics that

increase or decrease the ease of entry into a market:

20

Given the understanding of where new entrants are likely to come from, Geroski (1999)

also provides suggested ways of identifying probable or possible entrants. These include

following the flow of valuable information outward from the market, which would assist

in identifying those companies in nearby markets who may know or have an

understanding of the same customers or be familiar with parts of the firm's value chain;

considering firms with especially relevant capabilities and assessing whether these

capabilities can be profitability applied in the industry concerned. Geroski (1999) also

acknowledges that market entry as a result of a related competency is arguably the most

difficult to anticipate, and suggests therefore that the analyst remain sensitive to this

difficulty, in order that he not overlook it completely.

Geroski (1999) recommends further that answenng the following questions would

facilitate the identification of firms who are likely entrants:

• What are the key competencies that an entrant will need to enter the market?

• Who is likely to possess such competencies?

• What observable actions do they have to take as to assemble the skills and assets

that they will need?

Assuming that the strategist is able to identify the potential entrants to the market, he

would need to pursue some course of action that would allow the finn to defend itself

against this threat. Porter (1985) lists the following underlying characteristics that

increase or decrease the ease of entry into a market:

20

• Economics of scale;

• Proprietary product difference;

• Brand identity;

• Switching costs;

• Capital requirements;

• Access to distributions;

• Absolute cost advantages;

• Government policy;

• Expected retaliation

Firms within an industry seeking to reduce the threat of new entrants could essentially

influence some or all of the above factors in a way that makes entry more difficult or less

attractive to potential entrants.

2.3.2 POWER OF SUPPLIERS

This research shall cover the area of supplier power, with the traditional view of supplier

power within the context of the Five Forces model, which essentially has as its objective,

that of reducing or minimizing the bargaining power of suppliers' vis-a.-vis the firm

(Porter, 1985). This view is held essentially because of the very real possibility that

21

• Economics of scale;

• Proprietary product difference;

• Brand identity;

• Switching costs;

• Capital requirements;

• Access to distributions;

• Absolute cost advantages;

• Government policy;

• Expected retaliation

Firms within an industry seeking to reduce the threat of new entrants could essentially

influence some or all of the above factors in a way that makes entry more difficult or less

attractive to potential entrants.

2.3.2 POWER OF SUPPLIERS

This research shall cover the area of supplier power, with the traditional view of supplier

power within the context of the Five Forces model, which essentially has as its objective,

that of reducing or minimizing the bargaining power of suppliers' vis-a.-vis the firm

(Porter, 1985). This view is held essentially because of the very real possibility that

21

suppliers in a strong bargaining position, in determining the prices and quality of raw

materials and other inputs, have the ability to restrict profitability in an industry (Porter,

1985). However, this research shall also visit the area of supplier collaboration, in order

to determine whether such collaboration can have the effect of improving the structure of

the industry, in which the firm operates, in order that the firm may consequently earn

greater profits (Hamel, Doz and Prahalad, 1998). Pearce and Robinson (2003) suggest

that suppliers are able to exert bargaining in a industry by raising prices or reducing the

quality of their offerings, and through this are able to reduce the profitability of an

industry that is unable to pass on these cost increases to their customers. They add further

to the power of suppliers is a function of the various characteristics of the market

situation.

Porter lists the following characteristics of supplier power:

• Differentiation of inputs;

• Switching costs of firms in an industry;

• Presence of substitute inputs;

• Supplier concentration;

• Importance of volume to suppliers;

• Cost relative to total purchases in the industry;

• Impact of inputs on costs or differentiation;

22

suppliers in a strong bargaining position, in determining the prices and quality of raw

materials and other inputs, have the ability to restrict profitability in an industry (Porter,

1985). However, this research shall also visit the area of supplier collaboration, in order

to determine whether such collaboration can have the effect of improving the structure of

the industry, in which the firm operates, in order that the firm may consequently earn

greater profits (Hamel, Doz and Prahalad, 1998). Pearce and Robinson (2003) suggest

that suppliers are able to exert bargaining in a industry by raising prices or reducing the

quality of their offerings, and through this are able to reduce the profitability of an

industry that is unable to pass on these cost increases to their customers. They add further

to the power of suppliers is a function of the various characteristics of the market

situation.

Porter lists the following characteristics of supplier power:

• Differentiation of inputs;

• Switching costs of firms in an industry;

• Presence of substitute inputs;

• Supplier concentration;

• Importance of volume to suppliers;

• Cost relative to total purchases in the industry;

• Impact of inputs on costs or differentiation;

22

• Threat of forward integration relative to threat of backward integration by firms in

the industry

McDonald (1999) also notes that the control of information and the control of

strategically important technology are potential sources of power in supplier

relationships.

Given the foregoing, it is evident that the relationship with suppliers is viewed, in the

main, as an adversarial one, where firms in an industry would generally seek to minimise

supplier power, in order that they (the firms) may earn greater profits (Dyer et aI. , 2002).

This view cannot be criticized too severely as it would be difficult to argue against the

notion that an industry where suppliers have very high bargaining power would generally

be less attractive than one where suppliers do not hold much power, all other things being

equal.

Nevertheless, the view expressed by Bamel et aI., (1989) that "a strategic alliance can

strengthen both companies against outsiders even as it weakens one partner vis-a-vis the

other", is one that warrants further exploration. Notwithstanding McDonald's (1999)

comment that "unequal power within partnerships can provide a serious obstacle to

effective partnerships", Dyer et aI., (1998) confirm that there have been, over the past

decade, an increasing emphasis on alliances, networks and supply chain management as

vehicles through which firms could gain competitive advantages.

23

• Threat of forward integration relative to threat of backward integration by firms in

the industry

McDonald (1999) also notes that the control of information and the control of

strategically important technology are potential sources of power in supplier

relationships.

Given the foregoing, it is evident that the relationship with suppliers is viewed, in the

main, as an adversarial one, where firms in an industry would generally seek to minimise

supplier power, in order that they (the firms) may earn greater profits (Dyer et aI. , 2002).

This view cannot be criticized too severely as it would be difficult to argue against the

notion that an industry where suppliers have very high bargaining power would generally

be less attractive than one where suppliers do not hold much power, all other things being

equal.

Nevertheless, the view expressed by Bamel et aI., (1989) that "a strategic alliance can

strengthen both companies against outsiders even as it weakens one partner vis-a-vis the

other", is one that warrants further exploration. Notwithstanding McDonald's (1999)

comment that "unequal power within partnerships can provide a serious obstacle to

effective partnerships", Dyer et aI., (1998) confirm that there have been, over the past

decade, an increasing emphasis on alliances, networks and supply chain management as

vehicles through which firms could gain competitive advantages.

23

Indeed, research suggests that finns would be well advised to think more strategically

about the role of suppliers as opposed to adopting a "one size fits all" approach (Dyer et

aI., 2002). They also recommended that each supplier be analysed strategically to

detennine the extent to which the supplier's product or service contributes to the core

competencies and competitive advantage of the buying finn and define a strategic partner

as one who provides inputs that are typically of high value and is an important

contributor to the differentiation of the finn's final product. It is evident that these are the

same attributes that add to the bargaining power of suppliers, as described above (Porter,

1985) and hence, reaffinns Dyer et aI., (2002) suggest that finns do not adopt a "one size

fits all" approach to supply chain management.

Hamel et aI., (1988) draws a distinction very succinctly when they suggest that finns may

engage in competitive collaboration to enhance internal skills and technology, but should

ensure that competitive advantages are not transferred. Jarillo (1988) holds the view that

co-operative relationships created and maintained by a finn can be source of its

competitive advantage.

Notwithstanding the potential power that the supplier may hold vis-a-vis the firm, or vice

versa, for collaboration to work on a sustainable basis to the mutual benefit of both

parties, there needs to be inter alia a large amount of trust between the parties (Lorenzoni

and Baden - Fuller, 1995). This is emphasized by Omar (2002) who suggests that when

the two parties along the supply chain (in this instance, car manufactures and dealers)

trust each other and engage in strategic collaboration, they serve customers better, reduce

overhead and operation costs and generally increase profits. He adds within this context,

that the collaboration leads to a greater "profit pie", resulting in an increased profit for

24

Indeed, research suggests that finns would be well advised to think more strategically

about the role of suppliers as opposed to adopting a "one size fits all" approach (Dyer et

aI., 2002). They also recommended that each supplier be analysed strategically to

detennine the extent to which the supplier's product or service contributes to the core

competencies and competitive advantage of the buying finn and define a strategic partner

as one who provides inputs that are typically of high value and is an important

contributor to the differentiation of the finn's final product. It is evident that these are the

same attributes that add to the bargaining power of suppliers, as described above (Porter,

1985) and hence, reaffinns Dyer et aI., (2002) suggest that finns do not adopt a "one size

fits all" approach to supply chain management.

Hamel et aI., (1988) draws a distinction very succinctly when they suggest that finns may

engage in competitive collaboration to enhance internal skills and technology, but should

ensure that competitive advantages are not transferred. Jarillo (1988) holds the view that

co-operative relationships created and maintained by a finn can be source of its

competitive advantage.

Notwithstanding the potential power that the supplier may hold vis-a-vis the firm, or vice

versa, for collaboration to work on a sustainable basis to the mutual benefit of both

parties, there needs to be inter alia a large amount of trust between the parties (Lorenzoni

and Baden - Fuller, 1995). This is emphasized by Omar (2002) who suggests that when

the two parties along the supply chain (in this instance, car manufactures and dealers)

trust each other and engage in strategic collaboration, they serve customers better, reduce

overhead and operation costs and generally increase profits. He adds within this context,

that the collaboration leads to a greater "profit pie", resulting in an increased profit for

24

both parties, who are accordingly both better off than before. Similarly, McDonald

(1999) observes that a high degree of trust between partners acts as a safeguard against

the dangers associated with an unequal distribution of power.

Dyer et aI., (1998) quote the example of Japanese firms, whose close supplier

relationships result in superior performance for various reasons, including inter alia more

information is shared resulting in both firms improving their ability to co-ordinate

interdependent tasks, firms are able to invest in dedicated or relation-specific assets

which lower costs, improve quality and increases the pace of product development and

the reliance on trust to govern relationships is efficient and minimizes transaction costs.

Given the experience with Japanese firms, Dyer et aI., (1998) recommends that firms

should maintain high levels of communication with strategic suppliers, provide

managerial assistance where appropriate, exchange personnel, make relation-specific

investments and to generally assist in ensuring that these suppliers have world-class

capabilities.

Given the foregoing fairly opposing VIews, of reducing supplier power in order to

Increase industry attractiveness, versus that of engaging strategic suppliers in

collaboration in order to increase profits for both parties (at the expense of those outside

the alliance). Jarillo's (1998) view that co-operative and competitive behaviours of a firm

are both compatible, complementary aspects of a unique reality is especially relevant.

However, it is Dyer et aI., (1998) words that are especially profound when they suggest

that "a company's ability to strategically segment suppliers in such a way as to relies the

benefits of both the arm's length (deliberately keep suppliers at arms length and avoid

25

both parties, who are accordingly both better off than before. Similarly, McDonald

(1999) observes that a high degree of trust between partners acts as a safeguard against

the dangers associated with an unequal distribution of power.

Dyer et aI., (1998) quote the example of Japanese firms, whose close supplier

relationships result in superior performance for various reasons, including inter alia more

information is shared resulting in both firms improving their ability to co-ordinate

interdependent tasks, firms are able to invest in dedicated or relation-specific assets

which lower costs, improve quality and increases the pace of product development and

the reliance on trust to govern relationships is efficient and minimizes transaction costs.

Given the experience with Japanese firms, Dyer et aI., (1998) recommends that firms

should maintain high levels of communication with strategic suppliers, provide

managerial assistance where appropriate, exchange personnel, make relation-specific

investments and to generally assist in ensuring that these suppliers have world-class

capabilities.

Given the foregoing fairly opposing VIews, of reducing supplier power in order to

Increase industry attractiveness, versus that of engaging strategic suppliers in

collaboration in order to increase profits for both parties (at the expense of those outside

the alliance). Jarillo's (1998) view that co-operative and competitive behaviours of a firm

are both compatible, complementary aspects of a unique reality is especially relevant.

However, it is Dyer et aI., (1998) words that are especially profound when they suggest

that "a company's ability to strategically segment suppliers in such a way as to relies the

benefits of both the arm's length (deliberately keep suppliers at arms length and avoid

25

any form of commitment) and the partner models (collaboration with strategic suppliers)

provides the key to future competitive advantage in supply chain management

2.3.3 POWER OF BUYERS

"Management literature suggests that competitive advantage comes from unique

resources that cannot be easily acquired, imitated or substituted for by others. It is

difficult to argue with this concept, provided that the resources in question are used to

produce something that customer's value" (ChatteIjee, 1978). Porter's (1985) comments

that the satisfaction of customer needs is a prerequisite to the viability of the industry are

consistent with this view and he goes on to add that customers must be willing to pay a

price for the offering that exceeds the firm's cost of production for the firm to survive in

the long fUll.

However, the critical question III determining profitability (and understanding

competitive strategy) is whether firms can retain the value that they create for customers,

or whether this value is competed away to others (Porter, 1985). Therefore, the power of

buyers determines the extent to which buyers retain most of the value created for

themselves, at the expense of firms in the industry (Porter, 1985).

Pearce and Robinson (2003) suggest that powerful buyers can reduce industry profits by

forcing down prices, demanding higher quality or superior service levels and playing

competitors off against each other. Porter (1985) lists the following characteristics that

underlie the bargaining power of buyers:

• Buyer concentration versus firm concentration;

26

any form of commitment) and the partner models (collaboration with strategic suppliers)

provides the key to future competitive advantage in supply chain management

2.3.3 POWER OF BUYERS

"Management literature suggests that competitive advantage comes from unique

resources that cannot be easily acquired, imitated or substituted for by others. It is

difficult to argue with this concept, provided that the resources in question are used to

produce something that customer's value" (ChatteIjee, 1978). Porter's (1985) comments

that the satisfaction of customer needs is a prerequisite to the viability of the industry are

consistent with this view and he goes on to add that customers must be willing to pay a

price for the offering that exceeds the firm's cost of production for the firm to survive in

the long fUll.

However, the critical question III determining profitability (and understanding

competitive strategy) is whether firms can retain the value that they create for customers,

or whether this value is competed away to others (Porter, 1985). Therefore, the power of

buyers determines the extent to which buyers retain most of the value created for

themselves, at the expense of firms in the industry (Porter, 1985).

Pearce and Robinson (2003) suggest that powerful buyers can reduce industry profits by

forcing down prices, demanding higher quality or superior service levels and playing

competitors off against each other. Porter (1985) lists the following characteristics that

underlie the bargaining power of buyers:

• Buyer concentration versus firm concentration;

26

• Buyer volume;

• Buyer switching costs;

• Buyer information;

• Ability to integrate backwards;

• Substitute products

• Product differentiation;

• Brand

• Impact on quality or performance;

• Buyer profits;

• Decision maker's incentives

10hnson and Scholes (2003) suggest that the bargaining power of suppliers and buyers

are forces that can be considered together, because they are linked and they can impose

similar constraints on the industry vis-a-vis the margins that firms in that industry can

earn. Hence, many of the considerations that applied to the power of suppliers are

readily applicable to buyers, including whether or not collaboration can co-exist with

competition vis-a-vis buyers. 10hnson and Scholes (2003) add, in this regard, that

collaboration between buyers and sellers is likely to be advantageous when such

collaboration adds greater value to the firm, than that added when operating on its own,

27

• Buyer volume;

• Buyer switching costs;

• Buyer information;

• Ability to integrate backwards;

• Substitute products

• Product differentiation;

• Brand

• Impact on quality or performance;

• Buyer profits;

• Decision maker's incentives

10hnson and Scholes (2003) suggest that the bargaining power of suppliers and buyers

are forces that can be considered together, because they are linked and they can impose

similar constraints on the industry vis-a-vis the margins that firms in that industry can

earn. Hence, many of the considerations that applied to the power of suppliers are

readily applicable to buyers, including whether or not collaboration can co-exist with

competition vis-a-vis buyers. 10hnson and Scholes (2003) add, in this regard, that

collaboration between buyers and sellers is likely to be advantageous when such

collaboration adds greater value to the firm, than that added when operating on its own,

27

and when the collaboration allows the firm to concentrate on and develop its own core

competencies, whilst moving other non-core functions to specialists.

Central to the process of determining the bargaining power of buyers understands who

the buyer is. Abell (1980) alludes to this when he argues that the first question to be

asked when conceptualizing a market is which is being served, i.e. which particular

customer group. Chan et aI., (1999) suggest that competitors in most industries

converge around a common definition of who the customer is, when the reality is often

that there exists a chain of customers who are directly or indirectly involved in the

buying decision. Moreover, given that customers whose own costs are driven by their

purchases, are increasingly looking to purchasing as a way to increase their profits and

therefore bring additional pressure to bear on prices, it is necessary for the firm wishing

to persuade customers to focus on total costs, as opposed to acquisition price only, to

have an accurate understanding of what its customers do and would value (Anderson

and Narus, 1998).

Chan et aI., (1999) also suggest that "challenging an industry's conventional wisdom

about which buyer group to target can lead to the discovery of new market space. By

looking across buyers groups, companies can gain new insights into how to redesign

their value curves to focus on a previously overlooked set of customers". Chan et aI.,

and Mauborgne (1999) advise, in a separate paper, that value innovation (which,

through its emphasis on value, places the buyer, not competition at the centre of

strategic thinking; and through its emphasis on innovation moves firms beyond

incrementalism to completely new ways of doing things) makes competition irrelevant

by offering new and superior buyer value. Moreover, this contributes to a reduction in

28

and when the collaboration allows the firm to concentrate on and develop its own core

competencies, whilst moving other non-core functions to specialists.

Central to the process of determining the bargaining power of buyers understands who

the buyer is. Abell (1980) alludes to this when he argues that the first question to be

asked when conceptualizing a market is which is being served, i.e. which particular

customer group. Chan et aI., (1999) suggest that competitors in most industries

converge around a common definition of who the customer is, when the reality is often

that there exists a chain of customers who are directly or indirectly involved in the

buying decision. Moreover, given that customers whose own costs are driven by their

purchases, are increasingly looking to purchasing as a way to increase their profits and

therefore bring additional pressure to bear on prices, it is necessary for the firm wishing

to persuade customers to focus on total costs, as opposed to acquisition price only, to

have an accurate understanding of what its customers do and would value (Anderson

and Narus, 1998).

Chan et aI., (1999) also suggest that "challenging an industry's conventional wisdom

about which buyer group to target can lead to the discovery of new market space. By

looking across buyers groups, companies can gain new insights into how to redesign

their value curves to focus on a previously overlooked set of customers". Chan et aI.,

and Mauborgne (1999) advise, in a separate paper, that value innovation (which,

through its emphasis on value, places the buyer, not competition at the centre of

strategic thinking; and through its emphasis on innovation moves firms beyond

incrementalism to completely new ways of doing things) makes competition irrelevant

by offering new and superior buyer value. Moreover, this contributes to a reduction in

28

the bargaining power of buyers and is supported in this regard, by Michael Dell's view

that a relationship with the customer provides valuable information, which in turn

allows the fIrm to leverage its relationships with both buyers and suppliers (Magretta,

2004).

2.3.4 THREAT OF SUBSTITUTES

The threat of substitutes determines the extent to which some other product or service

can meet the same buyer needs, thereby constraining the profIt potential of an industry

by effectively placing a ceiling on prices that fIrms in that industry may change (Porter,

1985; Pearce and Robinson, 1997; Johnson and Scholes, 2003). Pearce and Robinson

(1999) add that substitute products not only limit the profIts of an industry in normal

times, as described above, but also reduce the bonanza that an industry would otherwise

enjoy in boom times.

Johnson and Scholes (1999) describe the different forms that substitution may take,

which include product-for-product substitution, substitution of a need by a new product

or service, generic substitution and doing without.

Chan Kim and Mauborgne (1999:84) agree "in the broadest sense, a company competes

not only with the companies in its own industries but also with companies in those

other industries that produce substitutes products or services." Hence, given that

generic substitution is an accepted form of substitution (Johnson and Scholes, 2003), it

is possible that light aircraft manufactures may fInd themselves in competition with

yacht manufactures, or as in the case of Callaway Golf Clubs, golf club manufactures

29

the bargaining power of buyers and is supported in this regard, by Michael Dell's view

that a relationship with the customer provides valuable information, which in turn

allows the fIrm to leverage its relationships with both buyers and suppliers (Magretta,

2004).

2.3.4 THREAT OF SUBSTITUTES

The threat of substitutes determines the extent to which some other product or service

can meet the same buyer needs, thereby constraining the profIt potential of an industry

by effectively placing a ceiling on prices that fIrms in that industry may change (Porter,

1985; Pearce and Robinson, 1997; Johnson and Scholes, 2003). Pearce and Robinson

(1999) add that substitute products not only limit the profIts of an industry in normal

times, as described above, but also reduce the bonanza that an industry would otherwise

enjoy in boom times.

Johnson and Scholes (1999) describe the different forms that substitution may take,

which include product-for-product substitution, substitution of a need by a new product

or service, generic substitution and doing without.

Chan Kim and Mauborgne (1999:84) agree "in the broadest sense, a company competes

not only with the companies in its own industries but also with companies in those

other industries that produce substitutes products or services." Hence, given that

generic substitution is an accepted form of substitution (Johnson and Scholes, 2003), it

is possible that light aircraft manufactures may fInd themselves in competition with

yacht manufactures, or as in the case of Callaway Golf Clubs, golf club manufactures

29

with tennis racquet manufactures (Chan et aI., 1999). Porter (1985) lists the following

as characteristics underlying the threat of substitution:

• Relative price-performance of substitutes;

• Switching costs;

• Buyer propensity to substitute; Are subject to trends improving their pnce­

performance trade-off with the industry's product

Pearce and Robinson (1999) advise that the substitute offerings that deserve the most

attention are those that:

• Are produced by industries earning high profits

Johnson and Scholes (2003) suggest that the key questions to ask in assessing the

extent of threat that substitutes pose, are:

• Does the substitute pose a threat of obsolescence to the industry's product, or does

it provide a higher perceived value to customers?

• What switching costs would buyers incur in moving to the substitute?

• To what extent can built in switching costs reduce the risk of substitution?

• In understanding the characteristic put forward by Porter et aI., (1999) suggests

that although sellers rarely think consciously about how their customers make

trade-offs across substitute industries, it is indeed, of critical importance in

developing insights that would facilitate the firm overcoming this threat, that they

30

with tennis racquet manufactures (Chan et aI., 1999). Porter (1985) lists the following

as characteristics underlying the threat of substitution:

• Relative price-performance of substitutes;

• Switching costs;

• Buyer propensity to substitute; Are subject to trends improving their pnce­

performance trade-off with the industry's product

Pearce and Robinson (1999) advise that the substitute offerings that deserve the most

attention are those that:

• Are produced by industries earning high profits

Johnson and Scholes (2003) suggest that the key questions to ask in assessing the

extent of threat that substitutes pose, are:

• Does the substitute pose a threat of obsolescence to the industry's product, or does

it provide a higher perceived value to customers?

• What switching costs would buyers incur in moving to the substitute?

• To what extent can built in switching costs reduce the risk of substitution?

• In understanding the characteristic put forward by Porter et aI., (1999) suggests

that although sellers rarely think consciously about how their customers make

trade-offs across substitute industries, it is indeed, of critical importance in

developing insights that would facilitate the firm overcoming this threat, that they

30

understand why buyers choose one substitute over another. They quote the

notable examples of Home Depot and Quicken, in this regard, who were both able

to revolutionize and expand their respective markets as a result inter alia of their

understanding of the value that buyers attached to substitute products.

Chan et aI., (1999) also argue, through the Quicken example, that in the instance where

more than one substitute exists, it is generally beneficial to explore those with the

greatest volumes in usage and monetary terms

2.3.5 COMPETITIVE RIVALRY

"A primary objective of competitor analysis is to understand and predict the rivalry, or

interactive market behaviour, between firms in the quest for a competitive position in

an industry" (Chen, 1996).

Chen (1996) defines competitors as "firms operating in the same industry, offering

similar products and targeting similar customers". Although this definition is not

agreed with fully by the authors the broader definition offered by Chan et aI., (1999)

above which suggests that competitors may indeed, come from alternate industries, is

perhaps more meaningful, the notion of "targeting similar customers" is an important

one in understanding competitive rivalry. Indeed, one could suggest that the broadest

definition of competitors is those firms that target similar competitors. Devlin (2002)

suggests that competition occurs amongst firms' offerings, rather than the firms

themselves, which fits in neatly with the concepts of collaboration and competition

existing side by side, discussed earlier. Devlin argues this view on the basis that

customers choose amongst offerings, not companies.

31

understand why buyers choose one substitute over another. They quote the

notable examples of Home Depot and Quicken, in this regard, who were both able

to revolutionize and expand their respective markets as a result inter alia of their

understanding of the value that buyers attached to substitute products.

Chan et aI., (1999) also argue, through the Quicken example, that in the instance where

more than one substitute exists, it is generally beneficial to explore those with the

greatest volumes in usage and monetary terms

2.3.5 COMPETITIVE RIVALRY

"A primary objective of competitor analysis is to understand and predict the rivalry, or

interactive market behaviour, between firms in the quest for a competitive position in

an industry" (Chen, 1996).

Chen (1996) defines competitors as "firms operating in the same industry, offering

similar products and targeting similar customers". Although this definition is not

agreed with fully by the authors the broader definition offered by Chan et aI., (1999)

above which suggests that competitors may indeed, come from alternate industries, is

perhaps more meaningful, the notion of "targeting similar customers" is an important

one in understanding competitive rivalry. Indeed, one could suggest that the broadest

definition of competitors is those firms that target similar competitors. Devlin (2002)

suggests that competition occurs amongst firms' offerings, rather than the firms

themselves, which fits in neatly with the concepts of collaboration and competition

existing side by side, discussed earlier. Devlin argues this view on the basis that

customers choose amongst offerings, not companies.

31

10hnson and Scholes (2003) refer to competitive rivalry as the extent of direct rivalry

between firms and their competitors. They add further that although the most

competitive conditions are those where there is strong likelihood of entry, buyers and

suppliers have much power and there is a strong threat of substitution, there are other

inter-firm conditions, which also affect competition significantly. It bears reference,

however, that firms in the same industry are not necessarily competitors and indeed,

two firms will have little motivation to engage each other in competition if they have

limited markets in common (Chen, 1996).

Porter (1985) suggests that the intensity of rivalry influences the prices that firm can

charge, as well as the costs of competing, and causes firms to either compete away the

value created by passing it on to buyers in the form of lower process or to dissipate the

value through the increased costs of competing. He also offers the following

characteristics, which underlie the notion of competitive rivalry:

• Industry growth;

• Fixed costs;

• Intermittent overcapacity;

• Product differences;

• Brand identity;

• Switching costs;

• Concentration and balance;

32

10hnson and Scholes (2003) refer to competitive rivalry as the extent of direct rivalry

between firms and their competitors. They add further that although the most

competitive conditions are those where there is strong likelihood of entry, buyers and

suppliers have much power and there is a strong threat of substitution, there are other

inter-firm conditions, which also affect competition significantly. It bears reference,

however, that firms in the same industry are not necessarily competitors and indeed,

two firms will have little motivation to engage each other in competition if they have

limited markets in common (Chen, 1996).

Porter (1985) suggests that the intensity of rivalry influences the prices that firm can

charge, as well as the costs of competing, and causes firms to either compete away the

value created by passing it on to buyers in the form of lower process or to dissipate the

value through the increased costs of competing. He also offers the following

characteristics, which underlie the notion of competitive rivalry:

• Industry growth;

• Fixed costs;

• Intermittent overcapacity;

• Product differences;

• Brand identity;

• Switching costs;

• Concentration and balance;

32

• Informational complexity;

• Diversity of competitors;

• Corporate stakes;

• Exit barriers

2.4 SUMMARY

This chapter provided an overview of the Five Forces model and discussed how

competitive forces shape strategy, before discussing in detail, each dimension of the

model and the issues relevant to that dimension or force. This was essential from the

perspective of providing a framework for analysis of the information that is

introduced in the chapters that follow. This includes the information obtained from

the independent brokers, broker manager, internet 1 www.luasa.co.za. internet2

www.LOA.co.za. and the other industry players' e.g. independent distributors.

Chapters 3 will cover these issues more detail.

The next chapter covers research methodology.

33

• Informational complexity;

• Diversity of competitors;

• Corporate stakes;

• Exit barriers

2.4 SUMMARY

This chapter provided an overview of the Five Forces model and discussed how

competitive forces shape strategy, before discussing in detail, each dimension of the

model and the issues relevant to that dimension or force. This was essential from the

perspective of providing a framework for analysis of the information that is

introduced in the chapters that follow. This includes the information obtained from

the independent brokers, broker manager, internet 1 www.luasa.co.za. internet2

www.LOA.co.za. and the other industry players' e.g. independent distributors.

Chapters 3 will cover these issues more detail.

The next chapter covers research methodology.

33

CHAPTER 3

RESEARCH METHODOLGY

3.1 INTRODUCTION

This study was a qualitative study that canvassed the support of independent brokers,

broker managers and provincial heads in the life and investment industry.

The research consisted of thirty five interviews with senior managers at nine life

companies', thirty independent brokers and two new entrants in the field. This was

augmented by a study documents of in house companies' and brokerages. All the

data that was collected in the pursuance of this study will be applied to the third party

distributor concept according to the dictates of the Five Forces framework.

3.2 RESEARCH PROCESS

The research process consisted of structured interviews with people in the life and

investment industry, which were followed by an open discussion process. It was

decided not to employ field workers and the researcher conducted all the fieldwork

personally. The reason being that most of the people consulted are senior industry

personnel and as the researcher as been in the industry for a long time he was able to

make contact with them. To have sent fieldworkers would have involved a training

process in terms of ethics,objectives of the research and aspects of the life and

investment industry. In addition there was the risk that fieldworkers would not be

granted interviews with senior managers. By having face to face contact with the

respondents the researcher was able to obtain more detailed information and through

34

CHAPTER 3

RESEARCH METHODOLGY

3.1 INTRODUCTION

This study was a qualitative study that canvassed the support of independent brokers,

broker managers and provincial heads in the life and investment industry.

The research consisted of thirty five interviews with senior managers at nine life

companies', thirty independent brokers and two new entrants in the field. This was

augmented by a study documents of in house companies' and brokerages. All the

data that was collected in the pursuance of this study will be applied to the third party

distributor concept according to the dictates of the Five Forces framework.

3.2 RESEARCH PROCESS

The research process consisted of structured interviews with people in the life and

investment industry, which were followed by an open discussion process. It was

decided not to employ field workers and the researcher conducted all the fieldwork

personally. The reason being that most of the people consulted are senior industry

personnel and as the researcher as been in the industry for a long time he was able to

make contact with them. To have sent fieldworkers would have involved a training

process in terms of ethics,objectives of the research and aspects of the life and

investment industry. In addition there was the risk that fieldworkers would not be

granted interviews with senior managers. By having face to face contact with the

respondents the researcher was able to obtain more detailed information and through

34

experience in the industry the researcher was able to structure the discussion in a

manner which ensured answers to questions.

One must be mindful of the fact that the target industry is undergoing change.

To determine the viability of this new independent distributor model within the life

and investment industry, the researcher had to obtain the views of experienced

industry managers. To ensure a good balance in the study, people were targeted

across the country. Some of the respondents were contacted and interviewed

telephonic ally or by email and others were met by the researcher on a fixed

appointment basis. This was done to secure greater representation from the different

role players that shape this industry. Another positive effect of this methodology

being that the chances of them not responding were reduced due to the direct and, or

personalised contact being made. It would have been possible in some instances to

have small groups of managers respond in a workshop situation. That approach was

considered and rejected as it was essential to get personal opinions and direct

answers and group sessions run the risk of a dominant personality or two controlling

the responses which would have negated the value of the responses.

Though most respondents were interviewed on a face to face basis, in a few cases the

interviews were telephonic and in one or two instances the respondents emailed the

researcher their views. In all instances appointments were made for interviews.

In addition to the above respondents that were targeted were individuals who are

committed to remain in an industry which meant that they would most likely offer

better comments than would people intending to leave the industry. This was

35

experience in the industry the researcher was able to structure the discussion in a

manner which ensured answers to questions.

One must be mindful of the fact that the target industry is undergoing change.

To determine the viability of this new independent distributor model within the life

and investment industry, the researcher had to obtain the views of experienced

industry managers. To ensure a good balance in the study, people were targeted

across the country. Some of the respondents were contacted and interviewed

telephonic ally or by email and others were met by the researcher on a fixed

appointment basis. This was done to secure greater representation from the different

role players that shape this industry. Another positive effect of this methodology

being that the chances of them not responding were reduced due to the direct and, or

personalised contact being made. It would have been possible in some instances to

have small groups of managers respond in a workshop situation. That approach was

considered and rejected as it was essential to get personal opinions and direct

answers and group sessions run the risk of a dominant personality or two controlling

the responses which would have negated the value of the responses.

Though most respondents were interviewed on a face to face basis, in a few cases the

interviews were telephonic and in one or two instances the respondents emailed the

researcher their views. In all instances appointments were made for interviews.

In addition to the above respondents that were targeted were individuals who are

committed to remain in an industry which meant that they would most likely offer

better comments than would people intending to leave the industry. This was

35

ascertained by targeting those individuals that have obtained their Financial Planning

Institute (FPI) accreditation. It is these people that will stay in the industry that will

begin to offer new opportunities though this industry is in a mature phase. Some of

the respondents were mere brokers whilst other were senior management, this spread

of people across a spectrum ensured that good feedback was received from people

across a large geographical area.

The study targeted people that held the recognised industry qualifications and the

necessary accreditations as required that by the Financial Services Board. Due to the

fact that some people were unavailable, the sample size was less than thirty five. In

spite of this, the data collected was valuable and it was used in this qualitative study.

By selecting qualified people it was hoped these people were more informed and thus

contributed better quality inputs to the study. Based on the quality of replies it

appears that, that was the case.

3.3 PILOT STUDY

A pilot study was conducted and based on that several changes were made to the

interview schedule. The pilot study consisted of two (2) accredited brokers, two (2)

senior managers, and one (1) provincial head. Initially a prompt sheet was used however

it was revised to ensure an easier, more flowing interview session. Care was taken to

explain that the nature of the research and the ethical issues to respondents before

commencing with the interview process which covered the current industry system and

the workings of the franchise model. The concise answers that came out of the pilot study

was a good indicator of the responsiveness of the brokers, managers and senior managers

36

ascertained by targeting those individuals that have obtained their Financial Planning

Institute (FPI) accreditation. It is these people that will stay in the industry that will

begin to offer new opportunities though this industry is in a mature phase. Some of

the respondents were mere brokers whilst other were senior management, this spread

of people across a spectrum ensured that good feedback was received from people

across a large geographical area.

The study targeted people that held the recognised industry qualifications and the

necessary accreditations as required that by the Financial Services Board. Due to the

fact that some people were unavailable, the sample size was less than thirty five. In

spite of this, the data collected was valuable and it was used in this qualitative study.

By selecting qualified people it was hoped these people were more informed and thus

contributed better quality inputs to the study. Based on the quality of replies it

appears that, that was the case.

3.3 PILOT STUDY

A pilot study was conducted and based on that several changes were made to the

interview schedule. The pilot study consisted of two (2) accredited brokers, two (2)

senior managers, and one (1) provincial head. Initially a prompt sheet was used however

it was revised to ensure an easier, more flowing interview session. Care was taken to

explain that the nature of the research and the ethical issues to respondents before

commencing with the interview process which covered the current industry system and

the workings of the franchise model. The concise answers that came out of the pilot study

was a good indicator of the responsiveness of the brokers, managers and senior managers

36

to costs effect means in distributing Life and Investment products in terms of global

trends.

Another issue that was of concern was the role that broker consultants of the various

Companies' would fill in the proposed model. Broker consultants have a role to play

but the form and shape of duties will be in line with proposed model.

3.4 INTERVIEWS

The interviews that were conducted with two(2) senior executives at Finanzplan SA, a

new broker distributor in the market, in Cape Town, Stanlib Regional management, small

brokerages, independent brokers and tied agents working for life · assurance companies.

These interviews were conducted on a structured basis. The purpose of the interview was

to establish the receptiveness of the life and investments companies to an entrant willing

to take on the distribution of its products. This enabled the researcher to determine

whether the companies are customer focussed or product focussed.

This research was exploratory in nature and canvassed a small percentage of key people

in the industry as a such from a scientific point a of view it is not sound to propose that

the model and the results of the interviews be proposed to be applied to the industry, until

such stage this research is replicated in wider and possibly in a quantitative study.

The interview process utilized an interview schedule to extract the information that was

required in order to fully discuss the franchise model (third party distributor) within the

life and investment industry.

37

to costs effect means in distributing Life and Investment products in terms of global

trends.

Another issue that was of concern was the role that broker consultants of the various

Companies' would fill in the proposed model. Broker consultants have a role to play

but the form and shape of duties will be in line with proposed model.

3.4 INTERVIEWS

The interviews that were conducted with two(2) senior executives at Finanzplan SA, a

new broker distributor in the market, in Cape Town, Stanlib Regional management, small

brokerages, independent brokers and tied agents working for life · assurance companies.

These interviews were conducted on a structured basis. The purpose of the interview was

to establish the receptiveness of the life and investments companies to an entrant willing

to take on the distribution of its products. This enabled the researcher to determine

whether the companies are customer focussed or product focussed.

This research was exploratory in nature and canvassed a small percentage of key people

in the industry as a such from a scientific point a of view it is not sound to propose that

the model and the results of the interviews be proposed to be applied to the industry, until

such stage this research is replicated in wider and possibly in a quantitative study.

The interview process utilized an interview schedule to extract the information that was

required in order to fully discuss the franchise model (third party distributor) within the

life and investment industry.

37

Interviews were conducted during and after working hours to suit the respondents.

Respondent were chosen at random from a list of members of the Financial Planning

Institute of South Africa and it was decided to target brokers in Cape Town,

Johannesburg, and KwaZulu- Natal. This was done to establish the whether such a

business will appeal to the broader market of Life and Investment professionals.

3.5 ETIDCAL ISSUES

All people interviewed were made aware that the research was for a dissertation in a

Master's degree in Business Administration and that their participation was voluntary and

that they were free to withdraw from the study if they wanted to. They were given the

assurance that their name and details will not be given to any other person or organisation

and they would not be named in the study. Respondents were informed that the records of

the interview would be securely stored and that they would eventually be destroyed as per

university policy at a point in the future.

This study was privately funded. There was no pressure from the industry to manipulate

or adjust the findings of this research.

3.6 PROBLEMS EXPERIENCED

The intention was to interview a greater number of people in the industry, but due to the

ongoing changes that the industry is facing and work pressures some agents and brokers

withdrew from the interview. An attempt was also made to speak to the ombudsman of

38

Interviews were conducted during and after working hours to suit the respondents.

Respondent were chosen at random from a list of members of the Financial Planning

Institute of South Africa and it was decided to target brokers in Cape Town,

Johannesburg, and KwaZulu- Natal. This was done to establish the whether such a

business will appeal to the broader market of Life and Investment professionals.

3.5 ETIDCAL ISSUES

All people interviewed were made aware that the research was for a dissertation in a

Master's degree in Business Administration and that their participation was voluntary and

that they were free to withdraw from the study if they wanted to. They were given the

assurance that their name and details will not be given to any other person or organisation

and they would not be named in the study. Respondents were informed that the records of

the interview would be securely stored and that they would eventually be destroyed as per

university policy at a point in the future.

This study was privately funded. There was no pressure from the industry to manipulate

or adjust the findings of this research.

3.6 PROBLEMS EXPERIENCED

The intention was to interview a greater number of people in the industry, but due to the

ongoing changes that the industry is facing and work pressures some agents and brokers

withdrew from the interview. An attempt was also made to speak to the ombudsman of

38

the life assurance industry but due to work pressures the researcher was not able to

conclude an interview.

In two to three instances a convenient alternative date and time could not be reached to

conduct the interview that was initially set up. There were a small percentage of people

who had agreed to an interview who could not make the interview due to unforeseen

circumstances and who cancelled

3.7 POSITIVE EXPERIENCES

It must be recorded that Finanzplan SA, which is based in Cape Town, was very

enthusiastic about the study. They are in the business of distributing life assurance

products for a limited number of companies. They were very interested to know how a

structured analysis of the industry would impact on the distribution segment of the life

and investment business.

An abbreviated presentation of Porter's Five Force model together with a competitor

analysis was made to FinanzPlan. They showed an interest in the value that was

presented and the probability that the study could help Finanzplan SA structure their

business with more focus giving them the edge when negotiating with life and

investments companies to capture distribution.

39

the life assurance industry but due to work pressures the researcher was not able to

conclude an interview.

In two to three instances a convenient alternative date and time could not be reached to

conduct the interview that was initially set up. There were a small percentage of people

who had agreed to an interview who could not make the interview due to unforeseen

circumstances and who cancelled

3.7 POSITIVE EXPERIENCES

It must be recorded that Finanzplan SA, which is based in Cape Town, was very

enthusiastic about the study. They are in the business of distributing life assurance

products for a limited number of companies. They were very interested to know how a

structured analysis of the industry would impact on the distribution segment of the life

and investment business.

An abbreviated presentation of Porter's Five Force model together with a competitor

analysis was made to FinanzPlan. They showed an interest in the value that was

presented and the probability that the study could help Finanzplan SA structure their

business with more focus giving them the edge when negotiating with life and

investments companies to capture distribution.

39

In their opinion it is critical to have a sound framework to distribute the products of life

or Investment Companies. They were of the belief that such a study will help their skills

to become a market leader in the changing fmancial services environment.

3.8 CONCLUSION

This chapter discussed the research methodology employed. It also indicated how the

fieldwork added value to the desk research carried out during the literature review phase.

The approach that was adopted was suitable for a qualitative study of this nature. The

chapters that follows will present the findings as found in the data from the research

process

40

In their opinion it is critical to have a sound framework to distribute the products of life

or Investment Companies. They were of the belief that such a study will help their skills

to become a market leader in the changing fmancial services environment.

3.8 CONCLUSION

This chapter discussed the research methodology employed. It also indicated how the

fieldwork added value to the desk research carried out during the literature review phase.

The approach that was adopted was suitable for a qualitative study of this nature. The

chapters that follows will present the findings as found in the data from the research

process

40

CHAPTER 4

DATA COLLECTION AND ANALYSIS

4.1 INTRODUCTION

In this chapter the data as interpreted from the interview process and the desktop

research phase of this study is presented. The information gathered is used to support

the argument for the third party distribution within this framework.

Since the researcher met and discussed the concept of the proposed independent

distributor model with Finanzplan, the company has adopted it and have and tested it

in the market place, which indicates that the model appears to be sound enough to

warrant implementation, monitoring and assessment by a large company. The other

new entrant in the market place is the Independent Financial Network (IFA). The

IF A has less that 500 brokers in its network and the German based Finanzplan has far

fewer brokers. Some international trends were examined to establish the viability of

such an organization within the South African context. Norwich Life in the United

Kingdom was the first company to begin rationalizing the sales in favour of

independent financial adviser networks. This has resulted in life and investment

companies becoming more client centric rather than product focussed.

4.2 INDUSTRY BOUNDARIES

In the context of the Five Forces model the industry is the arena in which the

competition occurs (Porter, 1980; 1985). The attractiveness of the industry is another

41

CHAPTER 4

DATA COLLECTION AND ANALYSIS

4.1 INTRODUCTION

In this chapter the data as interpreted from the interview process and the desktop

research phase of this study is presented. The information gathered is used to support

the argument for the third party distribution within this framework.

Since the researcher met and discussed the concept of the proposed independent

distributor model with Finanzplan, the company has adopted it and have and tested it

in the market place, which indicates that the model appears to be sound enough to

warrant implementation, monitoring and assessment by a large company. The other

new entrant in the market place is the Independent Financial Network (IFA). The

IF A has less that 500 brokers in its network and the German based Finanzplan has far

fewer brokers. Some international trends were examined to establish the viability of

such an organization within the South African context. Norwich Life in the United

Kingdom was the first company to begin rationalizing the sales in favour of

independent financial adviser networks. This has resulted in life and investment

companies becoming more client centric rather than product focussed.

4.2 INDUSTRY BOUNDARIES

In the context of the Five Forces model the industry is the arena in which the

competition occurs (Porter, 1980; 1985). The attractiveness of the industry is another

41

important determinant of profitability, therefore it becomes important to establish the

boundaries within which finns should operate.

The study refers to the independent distributors of life and investment products. The

assurance and investment business may be divided into many segments. These

segments are as follows, product development, asset management, risk management,

premium administration, distribution (Knight and Morgan, 1995). The current study

as undertaken by the researcher takes a view on the distribution of the products in the

life and investment business in South Africa. The model that is illustrated in figure

1.1 of chapter! shows the move from a tied distribution to an independent

distribution.

The industry is made up of various players such as independent brokers, tied agents,

consultants, managers, and direct sales. These channels compete not with other life

and investment companies but with the sales channels within an organization, hence

brokers will compete with agents regardless of the fact that the both may be

competing for the same product provider. This is illustrated in figure 4.1. below.

42

important determinant of profitability, therefore it becomes important to establish the

boundaries within which finns should operate.

The study refers to the independent distributors of life and investment products. The

assurance and investment business may be divided into many segments. These

segments are as follows, product development, asset management, risk management,

premium administration, distribution (Knight and Morgan, 1995). The current study

as undertaken by the researcher takes a view on the distribution of the products in the

life and investment business in South Africa. The model that is illustrated in figure

1.1 of chapter! shows the move from a tied distribution to an independent

distribution.

The industry is made up of various players such as independent brokers, tied agents,

consultants, managers, and direct sales. These channels compete not with other life

and investment companies but with the sales channels within an organization, hence

brokers will compete with agents regardless of the fact that the both may be

competing for the same product provider. This is illustrated in figure 4.1. below.

42

/l~ ,-~--...,.,...-. --.- ~- ~--... -~-'~'''''''1 " ........ ,_ ~' ''''''_''' " ~~"""""'7"""'" .... ] .... " -~. " .... "._ .... ' ~.~ .... .., .. "~,,

lll,i lll,-~nll(~ll 1 1 ~, )1, " 0 1 '- __ ....... _ I

, , ~\ ~:"~. i c--s 1

! I

1~ lr\S'~l ~:]l\:~ ~ ,

, - - - --" -" - - - - - - -~ --- ~ - - - ---- -,

1

Figure 4.1 Current distributions by Life and Investment companies

THREAT OF ENTRY

This refers to the probability of a new firm entering an industry and as a result

competes away the value created by that industry (Porter, 1980; 1985)

43

/l~ ,-~--...,.,...-. --.- ~- ~--... -~-'~'''''''1 " ........ ,_ ~' ''''''_''' " ~~"""""'7"""'" .... ] .... " -~. " .... "._ .... ' ~.~ .... .., .. "~,,

lll,i lll,-~nll(~ll 1 1 ~, )1, " 0 1 '- __ ....... _ I

, , ~\ ~:"~. i c--s 1

! I

1~ lr\S'~l ~:]l\:~ ~ ,

, - - - --" -" - - - - - - -~ --- ~ - - - ---- -,

1

Figure 4.1 Current distributions by Life and Investment companies

THREAT OF ENTRY

This refers to the probability of a new firm entering an industry and as a result

competes away the value created by that industry (Porter, 1980; 1985)

43

4.3.1 SOURCE OF NEW ENTRANT

It is suggested that new entrants are likely to come from the following areas (Geroski,

1999)

RELATED PRODUCT MARKETS

FIRMS UP AND DOWN THE VALUE CHAIN

FIRMS WITH RELATED COMPETENCIES

Fig.4.2. Source of New Entrant Source: Porter (1985)

It would be logical to identify firms or players that fall into one or more of these

categories

4.3.1.1 RELATED PRODUCT MARKETS

It is suggested by Geroski (1999) that related products are those goods and services that

customers use together that are produced by firms in the same industry, in other words

these may be complementary offerings. Stemming from this it would be useful to

ascertain the goods and services that brokers will require with their contracts to sell life

and investment products on behalf of service providers.

44

4.3.1 SOURCE OF NEW ENTRANT

It is suggested that new entrants are likely to come from the following areas (Geroski,

1999)

RELATED PRODUCT MARKETS

FIRMS UP AND DOWN THE VALUE CHAIN

FIRMS WITH RELATED COMPETENCIES

Fig.4.2. Source of New Entrant Source: Porter (1985)

It would be logical to identify firms or players that fall into one or more of these

categories

4.3.1.1 RELATED PRODUCT MARKETS

It is suggested by Geroski (1999) that related products are those goods and services that

customers use together that are produced by firms in the same industry, in other words

these may be complementary offerings. Stemming from this it would be useful to

ascertain the goods and services that brokers will require with their contracts to sell life

and investment products on behalf of service providers.

44

A discussion with independent brokers with reference to question one of the

questionnaire, revealed that they require marketing information as a complementary

service, while training also featured but more specifically brokers indicated that they

required training in order to sell the products on behalf of the life or investment company.

There was the requirement of technology products from the life and investment company.

This they argued would complement the high level of service that is demanded of them

from the various regulatory bodies that oversee the well being of the consumer in the

current environment. In this case it is the Financial Services Board and the Life Offices

Association.

This is consistent with the findings from question one of the questionnaire. managers at

life assurances companies and investment firms that were surveyed, where 100% of these

managers felt that marketing information and training were both necessary

complementary services that enabled the brokers to sell the products and services of the

life and investment companies. Technology services were also a high priority with the

mangers that were surveyed with 77.8% of those surveyed attesting to this.

Marketing Information 100%

Training 100%

Technology Services 77.8%

Source: Table. 4.2 Survey of Broker Managers

Given the above, it is safe to conclude that the important complimentary services required

by brokers with their contracts to a product providers offering is marketing material,

45

A discussion with independent brokers with reference to question one of the

questionnaire, revealed that they require marketing information as a complementary

service, while training also featured but more specifically brokers indicated that they

required training in order to sell the products on behalf of the life or investment company.

There was the requirement of technology products from the life and investment company.

This they argued would complement the high level of service that is demanded of them

from the various regulatory bodies that oversee the well being of the consumer in the

current environment. In this case it is the Financial Services Board and the Life Offices

Association.

This is consistent with the findings from question one of the questionnaire. managers at

life assurances companies and investment firms that were surveyed, where 100% of these

managers felt that marketing information and training were both necessary

complementary services that enabled the brokers to sell the products and services of the

life and investment companies. Technology services were also a high priority with the

mangers that were surveyed with 77.8% of those surveyed attesting to this.

Marketing Information 100%

Training 100%

Technology Services 77.8%

Source: Table. 4.2 Survey of Broker Managers

Given the above, it is safe to conclude that the important complimentary services required

by brokers with their contracts to a product providers offering is marketing material,

45

training and technology services. From this it can be reasonable deduced that a new

entrant could come from any of these three areas.

The internal marketing divisions of the various product providers generally produce

marketing information. In the general scheme of things this function does not present a

huge opportunity to becoming a service provider to the related industry. This stems from

that fact that people that lack industry knowledge and experience internally produce all

marketing information.

Within the realms of training, development and technology major opportunities present

themselves. Trainers and technologists require lots of industry experience in order to

function optimally in the life and investment business. These two areas could present a

significant threat of entry, as was the case with the ''New Venture Academy" which was

setup by former trainers of Liberty Life. They trained managers and recruits for Liberty

Life franchises. These franchise are not outsourced distributions, they are merely off site

operations in terms of Liberty's growth strategy. They are still funded by the parent

company and they must subscribe to the performance criteria as set by Liberty Life. The

model being envisaged will operate independently from all Life and Investment

companies. Its specific mandate will focus around the distribution of the various

companies' products.

By the same token providers of information technology could present a threat as

evidenced by the advent of" Adivcenet", an independent provider of financial planning

46

training and technology services. From this it can be reasonable deduced that a new

entrant could come from any of these three areas.

The internal marketing divisions of the various product providers generally produce

marketing information. In the general scheme of things this function does not present a

huge opportunity to becoming a service provider to the related industry. This stems from

that fact that people that lack industry knowledge and experience internally produce all

marketing information.

Within the realms of training, development and technology major opportunities present

themselves. Trainers and technologists require lots of industry experience in order to

function optimally in the life and investment business. These two areas could present a

significant threat of entry, as was the case with the ''New Venture Academy" which was

setup by former trainers of Liberty Life. They trained managers and recruits for Liberty

Life franchises. These franchise are not outsourced distributions, they are merely off site

operations in terms of Liberty's growth strategy. They are still funded by the parent

company and they must subscribe to the performance criteria as set by Liberty Life. The

model being envisaged will operate independently from all Life and Investment

companies. Its specific mandate will focus around the distribution of the various

companies' products.

By the same token providers of information technology could present a threat as

evidenced by the advent of" Adivcenet", an independent provider of financial planning

46

software to the life and investment industry. They have in excess of three thousand

clients (3000) intermediaries as clients.

Therefore it may be concluded that the threat of entry posed by from related product

markets emanate largely from training companies that provide a service to the life

assurance and investment industry. The other impending threat is the developers of

information technology systems for this industry.

4.3.1.2 FIRMS UP AND DOWN THE VALUE CHAIN

From the research it is clear that firms that are up the value chain are the product

providers. These are the Life assurance companies, asset management companies, unit

trust companies, and other risk providers. Given the size and large number of both

service and product providers any new entrant will provide a threat to the suppliers. The

manner in which life assurance is sold may pose a huge threat to a new entrant given the

fact that these conglomerates will not want to lose control of their advantage through

their distribution model.

Of significance however, chief executive officers of life assurance companies (LOA,

website: 2004) in South Africa, 11.1% indicated that the distribution of products is not

there core business, while 33.3% indicated that there is related to the kind of distribution

model that they follow.

47

software to the life and investment industry. They have in excess of three thousand

clients (3000) intermediaries as clients.

Therefore it may be concluded that the threat of entry posed by from related product

markets emanate largely from training companies that provide a service to the life

assurance and investment industry. The other impending threat is the developers of

information technology systems for this industry.

4.3.1.2 FIRMS UP AND DOWN THE VALUE CHAIN

From the research it is clear that firms that are up the value chain are the product

providers. These are the Life assurance companies, asset management companies, unit

trust companies, and other risk providers. Given the size and large number of both

service and product providers any new entrant will provide a threat to the suppliers. The

manner in which life assurance is sold may pose a huge threat to a new entrant given the

fact that these conglomerates will not want to lose control of their advantage through

their distribution model.

Of significance however, chief executive officers of life assurance companies (LOA,

website: 2004) in South Africa, 11.1% indicated that the distribution of products is not

there core business, while 33.3% indicated that there is related to the kind of distribution

model that they follow.

47

The study went on to further unpack this issue of distribution and the 66.7% of the chief

executive officers confirmed that the core competences of their organization were related

to distribution while 100% of them viewed distribution as being critical to their business.

Currently the view on a new entrant seems to a balanced one. The new regulatory

framework that is at play in its current form is the key deciding factor on the issue of a

new entrant. Given the fact there are views of certainty on the one hand and uncertainty

on the other hand, the threat of a new entrant from firms up the value chain may be

considered to be high.

The other side of the value chain consists of independent brokers. The recognized

governing bodies could not verify the exact number of independent brokers. All that

could be ascertained was that there are in excess of 40000 intermediaries with the

requisite minimum criteria to act as financial planners. These include tied agents and

brokers with the Financial services Board of South Africa. Tied agents would also be

potential customers and therefore may be potential entrants. Due to the similarities

between tied agents and independent brokers, for the purposes of this study we will treat

them as being independent brokers. From the numbers alone we can deduce that there

exists a very real threat of entry from firms down the industry value chain. The firms may

be faced with constraints and the largest one being the capital requirements to sustain and

grow a viable distribution.

In term of general discussion held during the survey of brokers, at least 66% of the

brokers are of the view that if broking was no longer an option, then they would seek

opportunities in other business activities not related to life or investment sales. The other

48

The study went on to further unpack this issue of distribution and the 66.7% of the chief

executive officers confirmed that the core competences of their organization were related

to distribution while 100% of them viewed distribution as being critical to their business.

Currently the view on a new entrant seems to a balanced one. The new regulatory

framework that is at play in its current form is the key deciding factor on the issue of a

new entrant. Given the fact there are views of certainty on the one hand and uncertainty

on the other hand, the threat of a new entrant from firms up the value chain may be

considered to be high.

The other side of the value chain consists of independent brokers. The recognized

governing bodies could not verify the exact number of independent brokers. All that

could be ascertained was that there are in excess of 40000 intermediaries with the

requisite minimum criteria to act as financial planners. These include tied agents and

brokers with the Financial services Board of South Africa. Tied agents would also be

potential customers and therefore may be potential entrants. Due to the similarities

between tied agents and independent brokers, for the purposes of this study we will treat

them as being independent brokers. From the numbers alone we can deduce that there

exists a very real threat of entry from firms down the industry value chain. The firms may

be faced with constraints and the largest one being the capital requirements to sustain and

grow a viable distribution.

In term of general discussion held during the survey of brokers, at least 66% of the

brokers are of the view that if broking was no longer an option, then they would seek

opportunities in other business activities not related to life or investment sales. The other

48

33% did not indicate what alternatives they would pursue. This seems to be in line with

the thinking of managers and chief executive officers mentioned earlier in this chapter.

Given these findings, one could reasonable conclude that the brokers do not pose a threat

of entry to the industry. As a result a threat of entry from firms down the value chain is

minimal.

4.3.1.3 FIRMS WITH RELATED COMPETENCIES

Firms that have traditionally not operated in the financial sector, which have the requisite

capabilities to compete may also serve as a potential entrant to the market ( Geroski,

1999). From his observation it is evident that firms will find it difficult to identify this

phenomenon. An example of this is the entry of supermarkets into the retail-banking

environment. This has also been evidenced by the advent of risk provider that was

previously dormant in short term insurance, eg Hollard Life Assurance.

It is essential to identify the competencies that would be necessary to compete in the life

and investment industry. A survey of independent brokers revealed the following most

important competencies.

49

33% did not indicate what alternatives they would pursue. This seems to be in line with

the thinking of managers and chief executive officers mentioned earlier in this chapter.

Given these findings, one could reasonable conclude that the brokers do not pose a threat

of entry to the industry. As a result a threat of entry from firms down the value chain is

minimal.

4.3.1.3 FIRMS WITH RELATED COMPETENCIES

Firms that have traditionally not operated in the financial sector, which have the requisite

capabilities to compete may also serve as a potential entrant to the market ( Geroski,

1999). From his observation it is evident that firms will find it difficult to identify this

phenomenon. An example of this is the entry of supermarkets into the retail-banking

environment. This has also been evidenced by the advent of risk provider that was

previously dormant in short term insurance, eg Hollard Life Assurance.

It is essential to identify the competencies that would be necessary to compete in the life

and investment industry. A survey of independent brokers revealed the following most

important competencies.

49

Competency

1. Interpersonal skills

2. Ability to motive brokers

3. Problem solving skills

4.Ability to impart knowledge

5. Technical knowledge

6. Administrative skills

7. Presentation skills

Table 4.3 Survey of independent broker, 2006 Source: Independent Brokers, (2006).

Percentage

76.7

53.3

50.0

46.7

40.0

36.7

33.3

Included in the same survey broker managers were also contacted to establish the

competencies that are require to service the broker force, and the results of the that survey

revealed the following;

50

Competency

1. Interpersonal skills

2. Ability to motive brokers

3. Problem solving skills

4.Ability to impart knowledge

5. Technical knowledge

6. Administrative skills

7. Presentation skills

Table 4.3 Survey of independent broker, 2006 Source: Independent Brokers, (2006).

Percentage

76.7

53.3

50.0

46.7

40.0

36.7

33.3

Included in the same survey broker managers were also contacted to establish the

competencies that are require to service the broker force, and the results of the that survey

revealed the following;

50

Competency

1. Interpersonal skills

2. Ability to motive brokers

3. Presentation skills

4. Administration skills

5. Ability to impart knowledge

6. Technical knowledge

7. Problem solving skills

Table 4.4 Survey of Broker Managers 2006 Source: Brokers Managers (2004).

Percentage

100.0

100.0

100.0

100.0

100.0

89.00

89.00

From the table above it is clear that broker managers felt that all these qualities are

essential to be successful in the quest for broker business, but by comparison both

independent brokers and managers displays some consistency in the servicing of brokers.

The independent distributor will be able to accomplish these competencies, as the need to

succeed will drive high service levels with professionally trained broker consultants.

In response to Geroski's (1999) question of identifYing potential entrants, this has been

answered in the above (table 4.4 survey of broker managers). The second issue of

identifying the competencies of such firm would be a onerous task due to the number of

firms that are currently operating in South Africa (LOA website), bears testimony to the

fact that Geroski's (1999) observing and identifying potential entrants is most difficult. It

51

Competency

1. Interpersonal skills

2. Ability to motive brokers

3. Presentation skills

4. Administration skills

5. Ability to impart knowledge

6. Technical knowledge

7. Problem solving skills

Table 4.4 Survey of Broker Managers 2006 Source: Brokers Managers (2004).

Percentage

100.0

100.0

100.0

100.0

100.0

89.00

89.00

From the table above it is clear that broker managers felt that all these qualities are

essential to be successful in the quest for broker business, but by comparison both

independent brokers and managers displays some consistency in the servicing of brokers.

The independent distributor will be able to accomplish these competencies, as the need to

succeed will drive high service levels with professionally trained broker consultants.

In response to Geroski's (1999) question of identifYing potential entrants, this has been

answered in the above (table 4.4 survey of broker managers). The second issue of

identifying the competencies of such firm would be a onerous task due to the number of

firms that are currently operating in South Africa (LOA website), bears testimony to the

fact that Geroski's (1999) observing and identifying potential entrants is most difficult. It

51

may be more useful to observe that the actions of new entrants that are starting such

businesses. Some of the activities that such an organization will take are as follows;

• Contracting with product providers

• Attracting broker consultants

• Attracting brokers

• Office infrastructure

• Investment in technology

4.3.2.1 ECONOMIES OF SCALE

Distribution is one of the areas in which economies of scale apply and holds true in the

life and investments industry. Initial investments are made in the areas of staff

compensation, office infrastructure, technology and relationships with brokers. As more

brokers contract to the firm the ratio of costs to premium income begins to reduce as a

result of the firm becomes more profitable. In the case of a new entrant whose initial

market penetration levels may not be as high as the more established firms will have to

sustain fmancial losses until such time that they have critical mass with brokers.

Finanzplan SA which is now establishing itself is in a position to attract some the leading

brokerages in the country thereby giving it the first mover advantage in the independent

broker market.

Brand loyalty is a significant factor in the life and investment business in South Africa.

This was addressed in question thirteen (13) of the survey questionnaire. The independent

52

may be more useful to observe that the actions of new entrants that are starting such

businesses. Some of the activities that such an organization will take are as follows;

• Contracting with product providers

• Attracting broker consultants

• Attracting brokers

• Office infrastructure

• Investment in technology

4.3.2.1 ECONOMIES OF SCALE

Distribution is one of the areas in which economies of scale apply and holds true in the

life and investments industry. Initial investments are made in the areas of staff

compensation, office infrastructure, technology and relationships with brokers. As more

brokers contract to the firm the ratio of costs to premium income begins to reduce as a

result of the firm becomes more profitable. In the case of a new entrant whose initial

market penetration levels may not be as high as the more established firms will have to

sustain fmancial losses until such time that they have critical mass with brokers.

Finanzplan SA which is now establishing itself is in a position to attract some the leading

brokerages in the country thereby giving it the first mover advantage in the independent

broker market.

Brand loyalty is a significant factor in the life and investment business in South Africa.

This was addressed in question thirteen (13) of the survey questionnaire. The independent

52

broker market places a large amount of business with long established life and investment

companies. This was strongly supported in the survey conducted by the researcher. It

revealed that 33.3% ofthe brokers surveyed placed business with certain life assurers as a

result of the popularity of the brand. This was also reinforced by the broker manager

survey in which it was show that broker placed business with certain life assurers because

of the popularity of their brand.

Notwithstanding the above, industry statistics(www.LOA.co.za) shows that almost 85%

of all new business continues to be placed with the 5 most popular companies. There was

no disclosure of any material product or other differences among the competing

companies. Therefore it may possible be that a lot of brokers maybe placing their

business with certain companies as a result of the brands of those companies without

understanding that to be the reason for it.

4.3.2.3 SWITCHING COSTS

This area may become significant in influencing or deterring a new entrant. It is the norm

with industry players that should a client move from one company to another there would

some cost implication to the client. Given the fact the firms have invested in the brokers

business through the broker consultant in ensuring that the broker is trained, that the

brokers' information systems are compatible and that brokers client base is managed and

administered would make it difficult for the broker to move to a new firm without

incurring any costs. The broker faces the risk of losing income through the potentia110ss

of clients as a result of a change in the management of the brokers' client base.

53

broker market places a large amount of business with long established life and investment

companies. This was strongly supported in the survey conducted by the researcher. It

revealed that 33.3% ofthe brokers surveyed placed business with certain life assurers as a

result of the popularity of the brand. This was also reinforced by the broker manager

survey in which it was show that broker placed business with certain life assurers because

of the popularity of their brand.

Notwithstanding the above, industry statistics(www.LOA.co.za) shows that almost 85%

of all new business continues to be placed with the 5 most popular companies. There was

no disclosure of any material product or other differences among the competing

companies. Therefore it may possible be that a lot of brokers maybe placing their

business with certain companies as a result of the brands of those companies without

understanding that to be the reason for it.

4.3.2.3 SWITCHING COSTS

This area may become significant in influencing or deterring a new entrant. It is the norm

with industry players that should a client move from one company to another there would

some cost implication to the client. Given the fact the firms have invested in the brokers

business through the broker consultant in ensuring that the broker is trained, that the

brokers' information systems are compatible and that brokers client base is managed and

administered would make it difficult for the broker to move to a new firm without

incurring any costs. The broker faces the risk of losing income through the potentia110ss

of clients as a result of a change in the management of the brokers' client base.

53

The assumption that the building in of switching costs could act as a significant barrier to

entry was tested in question eight (8) of the survey of both independent brokers and

broker managers, where in the case of independent brokers, the major switching cost was

perceived to be the need to establish a new relationship, with 53.3% of the respondents

highlighting this. The need to promote the new company to clients and the loss of

renewal income was also perceived to an important cost with 43.3% of the respondents

suggesting that this would be so. This was followed by the possibility of losing the

services of the existing company (40%) and the loss of client information (36.7%)

The broker manager survey showed that following to be the most significant switching

cost that would be incurred: the need to establish a new relationship (77.8%), the need to

promote the new company to their clients (77.8%) and the loss of service from the

existing company (56.6%).

Given these as well as other significant switching costs that the firm could build in as a

result of co-managing the broker's client base, it may be concluded that the firm would

be able to build in high switching costs. This together with the low number of competent

intermediaries in South Africa as evidenced by the low number certified financial

planners (ppr website, 2005) does significantly reduce the threat of entry

4.3.2.4 ACCESS TO DISTRIBUTION

The firm distributes it products through brokers, of which there is a limited number.

Moreover, it is evident from international trends, with the most recent examples being

54

The assumption that the building in of switching costs could act as a significant barrier to

entry was tested in question eight (8) of the survey of both independent brokers and

broker managers, where in the case of independent brokers, the major switching cost was

perceived to be the need to establish a new relationship, with 53.3% of the respondents

highlighting this. The need to promote the new company to clients and the loss of

renewal income was also perceived to an important cost with 43.3% of the respondents

suggesting that this would be so. This was followed by the possibility of losing the

services of the existing company (40%) and the loss of client information (36.7%)

The broker manager survey showed that following to be the most significant switching

cost that would be incurred: the need to establish a new relationship (77.8%), the need to

promote the new company to their clients (77.8%) and the loss of service from the

existing company (56.6%).

Given these as well as other significant switching costs that the firm could build in as a

result of co-managing the broker's client base, it may be concluded that the firm would

be able to build in high switching costs. This together with the low number of competent

intermediaries in South Africa as evidenced by the low number certified financial

planners (ppr website, 2005) does significantly reduce the threat of entry

4.3.2.4 ACCESS TO DISTRIBUTION

The firm distributes it products through brokers, of which there is a limited number.

Moreover, it is evident from international trends, with the most recent examples being

54

that of the United Kingdom and Australia (www.IFA.co.za). that the number of brokers

may decline due to the regulation in the industry and as a result reducing the number the

of available distribution outlets. It would be prudent for the firm to gain a larger portion

of the market as this will help in building a barrier to entry.

In the presentation with Finanzplan SA the importance of converting tied agents into

independent brokers was also discussed. The view that the firm must to seek to build

good quality relationships with suppliers who are the also the employers of these tied

agents. Momentum Life moved away from the tied agency system of distribution to one

of a broker distribution system. The main driver behind such a move was the enormous

costs the company would in sustaining such a distribution network. This resulted in the

conversion of agency contracts into broker contracts. Building a strong brand may also

assist in ensuring that these agent, in the event they decide to become brokers, are

attracted to the firm rather than to new entrants

4.3.2.5 EXPECTED RETALIATION

Retaliation to new entrant could take various forms and could be a deterrent to new

entrants, but is not necessarily recommended. Such retaliation could include reducing the

volumes of business of suppliers who offer their products via the new entrant, withdraw

the services to the broker who enter into negotiations with the new entrant. Given the

generally collaborative nature of both the buyer and the supplier relationship, these

methods would not be recommended and the reliance should, therefore, be placed on the

aforesaid characteristics to reduce the threat of new entrant to the market.

55

that of the United Kingdom and Australia (www.IFA.co.za). that the number of brokers

may decline due to the regulation in the industry and as a result reducing the number the

of available distribution outlets. It would be prudent for the firm to gain a larger portion

of the market as this will help in building a barrier to entry.

In the presentation with Finanzplan SA the importance of converting tied agents into

independent brokers was also discussed. The view that the firm must to seek to build

good quality relationships with suppliers who are the also the employers of these tied

agents. Momentum Life moved away from the tied agency system of distribution to one

of a broker distribution system. The main driver behind such a move was the enormous

costs the company would in sustaining such a distribution network. This resulted in the

conversion of agency contracts into broker contracts. Building a strong brand may also

assist in ensuring that these agent, in the event they decide to become brokers, are

attracted to the firm rather than to new entrants

4.3.2.5 EXPECTED RETALIATION

Retaliation to new entrant could take various forms and could be a deterrent to new

entrants, but is not necessarily recommended. Such retaliation could include reducing the

volumes of business of suppliers who offer their products via the new entrant, withdraw

the services to the broker who enter into negotiations with the new entrant. Given the

generally collaborative nature of both the buyer and the supplier relationship, these

methods would not be recommended and the reliance should, therefore, be placed on the

aforesaid characteristics to reduce the threat of new entrant to the market.

55

It bears reference to the fact that Finanzplan SA have indicated that they would observe

but not take any other retaliatory action against new entrants, on the presumption that

their high service levels and other switching costs would ensure their retention levels of

brokers in the distribution networks. This was established in discussion with Finanzplan

SA about its strategy to retain brokers that are contracted to them. They have decided to

counteract pressure from other new entrants with excellent service and competitive

product offerings.

4.4 THREAT OF SUBSTITUTES

The treat of substitutes determines the extent to which some other product or service can

meet the same buyers needs, thereby constraining the profit potential of an industry by

effectively placing a ceiling on prices that the firms in the an industry may charge (Porter,

1985; Pearce and Robinson, 1997: 10hnson and Scholes, 2003).

4.4.1. TYPES OF SUBSTITUTION

The different forms that substitution may take were described by 10hnson and Scholes

(2003) were as follows. Product for product substitution, substitution of the need by a

new product or service, generic substitution and doing without, and these are assessed

more fully in order to determine inter alia what possible substitutes may exist within the

context of this industry.

56

It bears reference to the fact that Finanzplan SA have indicated that they would observe

but not take any other retaliatory action against new entrants, on the presumption that

their high service levels and other switching costs would ensure their retention levels of

brokers in the distribution networks. This was established in discussion with Finanzplan

SA about its strategy to retain brokers that are contracted to them. They have decided to

counteract pressure from other new entrants with excellent service and competitive

product offerings.

4.4 THREAT OF SUBSTITUTES

The treat of substitutes determines the extent to which some other product or service can

meet the same buyers needs, thereby constraining the profit potential of an industry by

effectively placing a ceiling on prices that the firms in the an industry may charge (Porter,

1985; Pearce and Robinson, 1997: 10hnson and Scholes, 2003).

4.4.1. TYPES OF SUBSTITUTION

The different forms that substitution may take were described by 10hnson and Scholes

(2003) were as follows. Product for product substitution, substitution of the need by a

new product or service, generic substitution and doing without, and these are assessed

more fully in order to determine inter alia what possible substitutes may exist within the

context of this industry.

56

4.4.1.1 PRODUCT -FOR-PRODUCT SUBSTITUTION

This occurs where the product or service of an industry is directly substituted by an

alternative offering, as in the example illustrated by Johnson and Scholes (2003) of email

replacing the fax machine. Whilst one could debate the attributes of the alternative

offering of product or service, and with all else being equal, the offering with more

advantages is likely to be the one to prevail in the marketplace (as in the case of email

over the fax machine). This also bears reference to the fact the pricing remains

competitive in respect of the alternative offering. It is in this way that the product -for­

product offering substitution places a ceiling on prices that may reasonably be charged

for a product.

The offering in question is essentially the provision of a contract for independent brokers

to place all their business with the different life and investment companies' via the

independent distributor, and to receive service, training, motivation and other benefits

from the independent distributor and its employees; the following may be identified as a

product -for -product substitutes:

• Ordinary broker contracts held separately by the broker with each life assurer,

where the broker places his business with those assurers with whom he holds

contracts and receive service, training and motivation from them. Whilst the

attributes of each alternative may be discussed at length, it is of significance that

the presence of this substitute effectively means that the firm wishing to channel

all the broker's business via itself, must pay the broker, rates of commission that

57

4.4.1.1 PRODUCT -FOR-PRODUCT SUBSTITUTION

This occurs where the product or service of an industry is directly substituted by an

alternative offering, as in the example illustrated by Johnson and Scholes (2003) of email

replacing the fax machine. Whilst one could debate the attributes of the alternative

offering of product or service, and with all else being equal, the offering with more

advantages is likely to be the one to prevail in the marketplace (as in the case of email

over the fax machine). This also bears reference to the fact the pricing remains

competitive in respect of the alternative offering. It is in this way that the product -for­

product offering substitution places a ceiling on prices that may reasonably be charged

for a product.

The offering in question is essentially the provision of a contract for independent brokers

to place all their business with the different life and investment companies' via the

independent distributor, and to receive service, training, motivation and other benefits

from the independent distributor and its employees; the following may be identified as a

product -for -product substitutes:

• Ordinary broker contracts held separately by the broker with each life assurer,

where the broker places his business with those assurers with whom he holds

contracts and receive service, training and motivation from them. Whilst the

attributes of each alternative may be discussed at length, it is of significance that

the presence of this substitute effectively means that the firm wishing to channel

all the broker's business via itself, must pay the broker, rates of commission that

57

are, at least similar to that which he would receive if he placed the business

directly with the life or investment company.

• Internet services to brokers where brokers hold separate contracts with life or

investment company in the traditional sense, but are serviced on a more cost

effective basis than currently, by the assurer serving them over the internet.

Again, whilst the attributes of each may be discussed at length, it is of

significance that the presence of this substitute effectively limits the margin that

the firm may expect to earn from life assurers. It is of reference in terms of

question thirteen, that 66.7% of the respondents in the survey of independent

brokers indicated that they would not be willing to be serviced over the internet,

whilst only 20.0%indicated that they would be willing to be serviced in this way.

The remaining respondents were uncertain. Moreover, whilst 77.8% of the

respondents in the survey of broker managers confirmed the Internet as a method

of servicing brokers, 100% of them also indicated that the volume of business

sold by brokers would decline in the event that broker consultants no longer

serviced them. Hence, the Internet is not likely to present a formidable threat of

substitution immediately. This may, however, change significantly with the

increased use of the Internet by the South African broker fraternity.

Hence, the major product-for-product substitute would be the traditional or ordinary

broker contract, whereby the broke transacts directly with the life and investment

company. This is likely to remain an important substitute over an extended period of

58

are, at least similar to that which he would receive if he placed the business

directly with the life or investment company.

• Internet services to brokers where brokers hold separate contracts with life or

investment company in the traditional sense, but are serviced on a more cost

effective basis than currently, by the assurer serving them over the internet.

Again, whilst the attributes of each may be discussed at length, it is of

significance that the presence of this substitute effectively limits the margin that

the firm may expect to earn from life assurers. It is of reference in terms of

question thirteen, that 66.7% of the respondents in the survey of independent

brokers indicated that they would not be willing to be serviced over the internet,

whilst only 20.0%indicated that they would be willing to be serviced in this way.

The remaining respondents were uncertain. Moreover, whilst 77.8% of the

respondents in the survey of broker managers confirmed the Internet as a method

of servicing brokers, 100% of them also indicated that the volume of business

sold by brokers would decline in the event that broker consultants no longer

serviced them. Hence, the Internet is not likely to present a formidable threat of

substitution immediately. This may, however, change significantly with the

increased use of the Internet by the South African broker fraternity.

Hence, the major product-for-product substitute would be the traditional or ordinary

broker contract, whereby the broke transacts directly with the life and investment

company. This is likely to remain an important substitute over an extended period of

58

time, as evidenced in the United States, for example, where despite the fact that

independent third party distributors have been in existence for some time, 70.21 % of the

business concluded by independent brokers continues to be placed in the traditional way

i.e. directly with the life or investment company (Dake and Mayo, 1996).

This was also evidenced in the low take on of brokers in the start up phase of Finanzplan

SA and the Independent Financial Adviser network. After discussion with the marketing

directors of both organizations, it was clear that a least 70% of the brokers canvassed by

them were resistant to change relationships with companies.

4.4.1.2 SUBSTITUTION OF THE NEED BY A NEW PRODUCT OR SERVICE

This refers to the situation where a new product or service effectively renders the existing

offering superfluous (Johnson and Scholes, 2003). In this instance, the product being

discussed effectively renders the ordinary broker contract granted individually by life and

investment houses; however, it is more difficult to identify those offerings that could

effectively render this offering superfluous. Nevertheless, the following may serve as

possibilities:

• Internet based selling may grow to the extent where end users buy increasingly

through this medium, thereby bypassing the broker and rendering any contract

that he may have superfluous. Although the internet may very well pose a threat

of increasing importance in the future, it does not, at the present time, represent a

significant distribution channel in terms of market share, as evidenced by the

findings of Gopalan (2000), which suggests that only 7.69% of Asian life

assurance companies currently use the internet as a distribution channel. The

59

time, as evidenced in the United States, for example, where despite the fact that

independent third party distributors have been in existence for some time, 70.21 % of the

business concluded by independent brokers continues to be placed in the traditional way

i.e. directly with the life or investment company (Dake and Mayo, 1996).

This was also evidenced in the low take on of brokers in the start up phase of Finanzplan

SA and the Independent Financial Adviser network. After discussion with the marketing

directors of both organizations, it was clear that a least 70% of the brokers canvassed by

them were resistant to change relationships with companies.

4.4.1.2 SUBSTITUTION OF THE NEED BY A NEW PRODUCT OR SERVICE

This refers to the situation where a new product or service effectively renders the existing

offering superfluous (Johnson and Scholes, 2003). In this instance, the product being

discussed effectively renders the ordinary broker contract granted individually by life and

investment houses; however, it is more difficult to identify those offerings that could

effectively render this offering superfluous. Nevertheless, the following may serve as

possibilities:

• Internet based selling may grow to the extent where end users buy increasingly

through this medium, thereby bypassing the broker and rendering any contract

that he may have superfluous. Although the internet may very well pose a threat

of increasing importance in the future, it does not, at the present time, represent a

significant distribution channel in terms of market share, as evidenced by the

findings of Gopalan (2000), which suggests that only 7.69% of Asian life

assurance companies currently use the internet as a distribution channel. The

59

United States experience is similar, where in terms of a submission by Dake and

Mayo (1996), only 2% of share of market measure by new individual life

premiums is attributable to direct sales, which includes the internet.

• Other forms of direct selling e.g. direct mail or telesales may, depending on its

success also render the broker superfluous. Gopalan (2000) suggests that this

method of distribution is more prevalent than the Internet, but remains

significantly less important than intermediary based distribution, with 23.08% of

the Asian life assurers using telemarketing and 51 .28% using direct mail. This is

in contrast to the to the 97.44% of the Asian life assurance companies that use

intermediary distribution channels. As stated earlier that only 2% of the market

share in the United States is attributable to direct response, and this includes

telemarketing and direct mail.

The inability of these alternative distribution channels to make significant inroads into the

industry may be attributed to the fact that most consumers prefer an intermediary to

facilitate their purchase of life and investment related products and Glenn Morgan (1995)

also alluded to the fact that life assurance is sold rather that This was supported by

Knights and Glenn Morgan (1995) who stated "the market for (life assurance) product

does not exist in advance of the personal selling encounters which constitute it." Knight

bought, and therefore requires the intervention of an intermediary to conclude the sale. It

maybe concluded that the substitution of the need by a new product or service is at this

stage very low.

60

United States experience is similar, where in terms of a submission by Dake and

Mayo (1996), only 2% of share of market measure by new individual life

premiums is attributable to direct sales, which includes the internet.

• Other forms of direct selling e.g. direct mail or telesales may, depending on its

success also render the broker superfluous. Gopalan (2000) suggests that this

method of distribution is more prevalent than the Internet, but remains

significantly less important than intermediary based distribution, with 23.08% of

the Asian life assurers using telemarketing and 51 .28% using direct mail. This is

in contrast to the to the 97.44% of the Asian life assurance companies that use

intermediary distribution channels. As stated earlier that only 2% of the market

share in the United States is attributable to direct response, and this includes

telemarketing and direct mail.

The inability of these alternative distribution channels to make significant inroads into the

industry may be attributed to the fact that most consumers prefer an intermediary to

facilitate their purchase of life and investment related products and Glenn Morgan (1995)

also alluded to the fact that life assurance is sold rather that This was supported by

Knights and Glenn Morgan (1995) who stated "the market for (life assurance) product

does not exist in advance of the personal selling encounters which constitute it." Knight

bought, and therefore requires the intervention of an intermediary to conclude the sale. It

maybe concluded that the substitution of the need by a new product or service is at this

stage very low.

60

4.4.1.3 GENERIC SUBSTITUTION

This occurs where products or services compete for need (Johnson and Scholes, 1999).

The need that the product in question fulfils the creating of a creating a source of income

for the broker, and hence any alternative sources of income that he may find would then

satisfy the definition of generic substitution. A significant threat in this regard, especially

amongst the less sophisticated brokers, is that of micro lending products where banks and

other lending institution often use brokers to distribute their products to the mass market,

in return for which the broker is paid a commission. However with the recent changes in

the regulatory framework, this threat has been minimized.

The survey of independent of brokers also suggested that a large number of brokers could

pursue alternative careers in other financial disciplines. However, the threat of generic

substitution remains low, since these moves to alternative sources of income would occur

largely under conditions where broking, for some reason, is no longer a career option for

the individual, and therefore change is forced upon him.

4.4.2. DEFENDING AGAINST THE THREAT

It is important to discuss the characteristics that Porter (1980; 1985) identifies as having

the ability to increase or decrease the threats of substitutes, within the context of whether

the firm would be able to influence these in its favour, thereby making the industry and

its competitive environment more attractive.

61

4.4.1.3 GENERIC SUBSTITUTION

This occurs where products or services compete for need (Johnson and Scholes, 1999).

The need that the product in question fulfils the creating of a creating a source of income

for the broker, and hence any alternative sources of income that he may find would then

satisfy the definition of generic substitution. A significant threat in this regard, especially

amongst the less sophisticated brokers, is that of micro lending products where banks and

other lending institution often use brokers to distribute their products to the mass market,

in return for which the broker is paid a commission. However with the recent changes in

the regulatory framework, this threat has been minimized.

The survey of independent of brokers also suggested that a large number of brokers could

pursue alternative careers in other financial disciplines. However, the threat of generic

substitution remains low, since these moves to alternative sources of income would occur

largely under conditions where broking, for some reason, is no longer a career option for

the individual, and therefore change is forced upon him.

4.4.2. DEFENDING AGAINST THE THREAT

It is important to discuss the characteristics that Porter (1980; 1985) identifies as having

the ability to increase or decrease the threats of substitutes, within the context of whether

the firm would be able to influence these in its favour, thereby making the industry and

its competitive environment more attractive.

61

4.4.2.1 RELATIVE PRICE - PERFORMANCEOF SUBSTITUTES

This refers to the performance of the substitute product relative to its price. Essentially

the lower or higher the performance of the substitute offering, the greater the likelihood

of the customer choosing the substitute over the product of the firm. Hence, the firm may

enhance position by continually improving its own price - performance trade off. This

could be achieved by focusing on those areas that brokers perceived to be important to

them, which was discovered in a study of independent brokers (refer to table 4.3)

Personal contact

Assistance with solving problems

Advice on business

Motivation

Sales ideas

Training

Assistance with presentations

Counselling

Table 4.5. Services that Brokers Value 2006 Source: Independent Brokers (2006)

22.1%

17.4%

15.1%

15.1%

11.6%

7.0%

7.0%

4.7%

Moreover, given that the most significant reason given by the independent brokers for

placing their business with specific companies was better product and that the

independent third party distributor would essentially provide access to the products of

most of the life and investment companies, it would immediately offer higher perceived

62

4.4.2.1 RELATIVE PRICE - PERFORMANCEOF SUBSTITUTES

This refers to the performance of the substitute product relative to its price. Essentially

the lower or higher the performance of the substitute offering, the greater the likelihood

of the customer choosing the substitute over the product of the firm. Hence, the firm may

enhance position by continually improving its own price - performance trade off. This

could be achieved by focusing on those areas that brokers perceived to be important to

them, which was discovered in a study of independent brokers (refer to table 4.3)

Personal contact

Assistance with solving problems

Advice on business

Motivation

Sales ideas

Training

Assistance with presentations

Counselling

Table 4.5. Services that Brokers Value 2006 Source: Independent Brokers (2006)

22.1%

17.4%

15.1%

15.1%

11.6%

7.0%

7.0%

4.7%

Moreover, given that the most significant reason given by the independent brokers for

placing their business with specific companies was better product and that the

independent third party distributor would essentially provide access to the products of

most of the life and investment companies, it would immediately offer higher perceived

62

value than those substitutes referred to. Its relative-performance may also be enhanced by

focusing on the second most important area that brokers chose as their reason for placing

business 'with specific companies. This was also corroborated by Finanzplan (2000),

where it was established that the major reason for placing business with certain

companies was "relationship with broker consultant".

Hence, given all of the foregoing, it is evident that substitutes which pose the most

serious threat viz. Traditional broker contacts which was discussed as a product-for­

product substitute, clearly offers a relatively inferior price- performance trade-off than

that which is available from the new firm. Whilst the new firm may use these factors to

increase its market share, it may not remove the threat of substitution presented by the

traditional broker contracts, as was evidenced in the United States.

4.4.2.2 SWITCHING COSTS

The building in of switching cost by a firm was viewed as important in reducing the

threat of entry; it also becomes similarly important in reducing the threat of substitutes.

The creation and the maintenance of strong relationships, training and development,

compatible information systems and joint management of the broker's client base, are

likely to create significant barriers to the broker changing his service provider, thereby

reducing the threat of substitutes. For switching to be relevant, the firm must in the fust

instance be able to attract the brokers, which may be difficult if the provider has built in

switching costs.

63

value than those substitutes referred to. Its relative-performance may also be enhanced by

focusing on the second most important area that brokers chose as their reason for placing

business 'with specific companies. This was also corroborated by Finanzplan (2000),

where it was established that the major reason for placing business with certain

companies was "relationship with broker consultant".

Hence, given all of the foregoing, it is evident that substitutes which pose the most

serious threat viz. Traditional broker contacts which was discussed as a product-for­

product substitute, clearly offers a relatively inferior price- performance trade-off than

that which is available from the new firm. Whilst the new firm may use these factors to

increase its market share, it may not remove the threat of substitution presented by the

traditional broker contracts, as was evidenced in the United States.

4.4.2.2 SWITCHING COSTS

The building in of switching cost by a firm was viewed as important in reducing the

threat of entry; it also becomes similarly important in reducing the threat of substitutes.

The creation and the maintenance of strong relationships, training and development,

compatible information systems and joint management of the broker's client base, are

likely to create significant barriers to the broker changing his service provider, thereby

reducing the threat of substitutes. For switching to be relevant, the firm must in the fust

instance be able to attract the brokers, which may be difficult if the provider has built in

switching costs.

63

4.4.2.3 BUYERS PROPENSITY TO SUBSTITUTE

It has transpired that 57% of brokers surveyed in terms of the questionnaire, would be

willing to move their business from one company to another if they were offered a

superior product or service, a small percentage indicated that they would not be willing to

change. This represents a high propensity to substitute one contract for another. Broker

managers on the other hand felt that there was a low propensity to change from one

provider to another. The conclusion that may be draw from this is that there is no clear

conclusion with regards to the broker' s propensity to substitute.

The study also revealed that only 20% of the brokers were willing to switch from being

serviced by broker consultants to the Internet. Notwithstanding the inability to draw clear

conclusions as a result of this contradiction, the broker's propensity to substitute is also

important from another perspective, which is in switching established brokers to the new

firms offering in the first instance.

Brokers revealed that they are likely to switch their business under the following

conditions;

• Breakdown in the relationship with Broker Consultant

• Better products

• Breakdown in the relationship with the company

• Better technology

64

4.4.2.3 BUYERS PROPENSITY TO SUBSTITUTE

It has transpired that 57% of brokers surveyed in terms of the questionnaire, would be

willing to move their business from one company to another if they were offered a

superior product or service, a small percentage indicated that they would not be willing to

change. This represents a high propensity to substitute one contract for another. Broker

managers on the other hand felt that there was a low propensity to change from one

provider to another. The conclusion that may be draw from this is that there is no clear

conclusion with regards to the broker' s propensity to substitute.

The study also revealed that only 20% of the brokers were willing to switch from being

serviced by broker consultants to the Internet. Notwithstanding the inability to draw clear

conclusions as a result of this contradiction, the broker's propensity to substitute is also

important from another perspective, which is in switching established brokers to the new

firms offering in the first instance.

Brokers revealed that they are likely to switch their business under the following

conditions;

• Breakdown in the relationship with Broker Consultant

• Better products

• Breakdown in the relationship with the company

• Better technology

64

Whilst the franchised distributor may not be in a position to influence the relationship

between the brokers and his existing broker consultant, it would be in position to offer

brokers the products of all life and investment companies, thus ensuring that they have

greater choice and would always, have access to the best products. The franchised

distributor should place itself in a position to cause the broker to switch from their current

provider.

4.4.3 ASSESSING THE EXTENT OF THE THREAT OF SUBSTITUTES

lohnson and Scholes (2003) suggested the answering of certain key questions, which are

designed to assist in the assessing the extent of the threat of substitutes, and these were

discussed previously. The second and third questions relate to the issue of switching costs

and have already been dealt with earlier, however, the fIrst question which asks whether

the substitutes poses the threat of obsolescence to the industry's product or does it

provide higher perceived value, is important.

The substitutes that have been identifIed are traditional broker contracts where the broker

contracts directly with the life assurer and is serviced by their employee/s, third party

distributors who service brokers via the internet, direct sales which bypass the

intermediary altogether.

The major players in the market are confIdent that an intermediary based distribution

would still remain relevant, hence, it would appear that alternative distribution channels

65

Whilst the franchised distributor may not be in a position to influence the relationship

between the brokers and his existing broker consultant, it would be in position to offer

brokers the products of all life and investment companies, thus ensuring that they have

greater choice and would always, have access to the best products. The franchised

distributor should place itself in a position to cause the broker to switch from their current

provider.

4.4.3 ASSESSING THE EXTENT OF THE THREAT OF SUBSTITUTES

lohnson and Scholes (2003) suggested the answering of certain key questions, which are

designed to assist in the assessing the extent of the threat of substitutes, and these were

discussed previously. The second and third questions relate to the issue of switching costs

and have already been dealt with earlier, however, the fIrst question which asks whether

the substitutes poses the threat of obsolescence to the industry's product or does it

provide higher perceived value, is important.

The substitutes that have been identifIed are traditional broker contracts where the broker

contracts directly with the life assurer and is serviced by their employee/s, third party

distributors who service brokers via the internet, direct sales which bypass the

intermediary altogether.

The major players in the market are confIdent that an intermediary based distribution

would still remain relevant, hence, it would appear that alternative distribution channels

65

e.g. internet and direct sales are unlikely to render franchised distributors or other fonns

of intennediary-based distribution obsolete.

It is not likely that traditional broker contracts would render the franchised distribution

method of distribution obsolete; indeed, the threat would appear to be the reverse viz. A

franchised distribution could potentially render traditional broker contracts obsolete.

However, the international experience suggests that both models for servicing brokers

shall remain relevant.

4.5. SUMMARY

In the above boundaries of the industry in which the franchised distributor will operate

were defined. It then went on to identify the sources of new entrants, who were assumed

to come from one of three areas viz. related product market, finns up and down the value

chain or finns with related competencies. Individuals or organizations that are

responsible for training intennediaries, providers of infonnation technology services to

the life and investment industry and finally, by the life and investment companies

themselves presented the major threats of entry.

The above also looked at the factors that the finn could look at in reducing the threat of

entry, and in this regard, economies of scale, brand, switching costs and access to

distribution represented defences to entry. It is important to note that whilst these barriers

to entry prove successful in defending against the threats posed by finns from related

product markets, it does not provide a material deterrent to the life and investment

companies, who continue, therefore to present a significant threat of entry.

66

e.g. internet and direct sales are unlikely to render franchised distributors or other fonns

of intennediary-based distribution obsolete.

It is not likely that traditional broker contracts would render the franchised distribution

method of distribution obsolete; indeed, the threat would appear to be the reverse viz. A

franchised distribution could potentially render traditional broker contracts obsolete.

However, the international experience suggests that both models for servicing brokers

shall remain relevant.

4.5. SUMMARY

In the above boundaries of the industry in which the franchised distributor will operate

were defined. It then went on to identify the sources of new entrants, who were assumed

to come from one of three areas viz. related product market, finns up and down the value

chain or finns with related competencies. Individuals or organizations that are

responsible for training intennediaries, providers of infonnation technology services to

the life and investment industry and finally, by the life and investment companies

themselves presented the major threats of entry.

The above also looked at the factors that the finn could look at in reducing the threat of

entry, and in this regard, economies of scale, brand, switching costs and access to

distribution represented defences to entry. It is important to note that whilst these barriers

to entry prove successful in defending against the threats posed by finns from related

product markets, it does not provide a material deterrent to the life and investment

companies, who continue, therefore to present a significant threat of entry.

66

The chapter then proceeded to define and assess the extent of the threat posed by the

different forms of substitution, where it found that the threat of greatest significance came

in the form of a product -for-product substitute and was the traditional broker contract,

offered directly to brokers by life and investment companies. Although defences were

identified, which firms could use in defending itself against the threat of substitution e.g.

relative price-performance and switching costs, these are not considered to be

significantly reducing this threat.

It may be concluded that life and investment companies present both major threats of

entry and substitution to the industry. These companies are therefore of special

significance and also act as suppliers to the firm, and their bargaining power will

therefore be assessed.

4.6 POWER OF SUPPLIERS

Given their ability to determine prices and quality of raw material and other inputs,

suppliers play a significant role in determining industry profitability (Porter, 1985). In

this instance, the supplier's role is of critical importance since the role of firms in the

industry in question is to distribute the product of these suppliers, in return for which the

firm receives a margin on commission paid to brokers. Hence, in the absence of effective

collaboration with these suppliers, the industry in question is effectively redundant

67

The chapter then proceeded to define and assess the extent of the threat posed by the

different forms of substitution, where it found that the threat of greatest significance came

in the form of a product -for-product substitute and was the traditional broker contract,

offered directly to brokers by life and investment companies. Although defences were

identified, which firms could use in defending itself against the threat of substitution e.g.

relative price-performance and switching costs, these are not considered to be

significantly reducing this threat.

It may be concluded that life and investment companies present both major threats of

entry and substitution to the industry. These companies are therefore of special

significance and also act as suppliers to the firm, and their bargaining power will

therefore be assessed.

4.6 POWER OF SUPPLIERS

Given their ability to determine prices and quality of raw material and other inputs,

suppliers play a significant role in determining industry profitability (Porter, 1985). In

this instance, the supplier's role is of critical importance since the role of firms in the

industry in question is to distribute the product of these suppliers, in return for which the

firm receives a margin on commission paid to brokers. Hence, in the absence of effective

collaboration with these suppliers, the industry in question is effectively redundant

67

4.6.1 CHARACTERISTICS OF SUPPLIER POWER

Notwithstanding the fact that collaboration with suppliers is viewed as essential to the

industry (to be discussed later), it is important to analyse the characteristics that influence

the bargaining power of suppliers (Porter, 1985).

4.6.1.1 PRODUCT DIFFERENTIATION

Johnson and Scholes (1999) define differentiation as the provision of product or service

that is perceived by the customer as being of a higher value than the offering provided by

competitors. Pearce and Robinson (1997) are somewhat more emphatic in their

assessment of differentiation, which they define as occurring when "businesses have

sustainable advantages that allow it to provide buyers with something uniquely valuable

to them".

The life and investment companies that operate in the market currently are of the opinion

that the products that they develop are differentiated in the market place. Broker

consultants and broker managers in the life and investment industry also corroborated this

VIew.

The fact that almost 85.14% of all business goes to the 5 major players in the life and

investment industry according to the www.LOA.co.za. would suggest that there is no

material difference between the product offerings between the companies.

68

4.6.1 CHARACTERISTICS OF SUPPLIER POWER

Notwithstanding the fact that collaboration with suppliers is viewed as essential to the

industry (to be discussed later), it is important to analyse the characteristics that influence

the bargaining power of suppliers (Porter, 1985).

4.6.1.1 PRODUCT DIFFERENTIATION

Johnson and Scholes (1999) define differentiation as the provision of product or service

that is perceived by the customer as being of a higher value than the offering provided by

competitors. Pearce and Robinson (1997) are somewhat more emphatic in their

assessment of differentiation, which they define as occurring when "businesses have

sustainable advantages that allow it to provide buyers with something uniquely valuable

to them".

The life and investment companies that operate in the market currently are of the opinion

that the products that they develop are differentiated in the market place. Broker

consultants and broker managers in the life and investment industry also corroborated this

VIew.

The fact that almost 85.14% of all business goes to the 5 major players in the life and

investment industry according to the www.LOA.co.za. would suggest that there is no

material difference between the product offerings between the companies.

68

It is further significant, that of all new business sold, 54.86% (www.LOA.co.za.) is sold

by brokers is placed with these 5 companies thereby suggesting that the reasons for these

five companies controlling such a large market share may lie outside of product

differentiation and is more likely a function of their own distribution capabilities. It is not

surprising that those companies with the largest market share also have large tied agency

forces in the country.

Given the foregoing, it would appear fair to suggest that no clear conclusions may be

drawn in respect of product differentiation of life and investment companies in South

Africa.

4.6.1.2 PRESENCE OF SUBSTITUTES

This refers to whether the industry has alternative inputs to those provided by current

suppliers (Johnson and Scho1es, 1999). Hence, suppliers other than the registered life

offices, which effectively constitute the life assurance industry in South Africa, need to

consider.

As alluded to previously there are some 34 unit trust management companies and in

excess of 30 registered offshore investment product providers currently in South Africa

(FSB web site, 2006), all of who develop products, which could effectively be viewed as

substitute input for the firm to distribute. It is of significance that these product providers

do not, in the main, have large established sales forces or other entrenched distribution

channels and would therefore be more willing to enter into agreement with the firm.

69

It is further significant, that of all new business sold, 54.86% (www.LOA.co.za.) is sold

by brokers is placed with these 5 companies thereby suggesting that the reasons for these

five companies controlling such a large market share may lie outside of product

differentiation and is more likely a function of their own distribution capabilities. It is not

surprising that those companies with the largest market share also have large tied agency

forces in the country.

Given the foregoing, it would appear fair to suggest that no clear conclusions may be

drawn in respect of product differentiation of life and investment companies in South

Africa.

4.6.1.2 PRESENCE OF SUBSTITUTES

This refers to whether the industry has alternative inputs to those provided by current

suppliers (Johnson and Scho1es, 1999). Hence, suppliers other than the registered life

offices, which effectively constitute the life assurance industry in South Africa, need to

consider.

As alluded to previously there are some 34 unit trust management companies and in

excess of 30 registered offshore investment product providers currently in South Africa

(FSB web site, 2006), all of who develop products, which could effectively be viewed as

substitute input for the firm to distribute. It is of significance that these product providers

do not, in the main, have large established sales forces or other entrenched distribution

channels and would therefore be more willing to enter into agreement with the firm.

69

However, the experience of Finanzplan SA would suggest that the products of these

providers by themselves are insufficient to attract brokers. This organization holds

contracts with a large number of the product providers, but has found that brokers, who

derive a large amount of their commission from life assurance sales, were unwilling to

contract to them on the basis of product alone. This bears reference to the fact the

different life companies are effectively substitutes for those of the others, and the

bargaining power of specific life assurers would be diluted therefore, if other life

companies were willing to provide their products to the firm at favourable terms.

4.6.1.3 SUPPLIER CONCENTRATION

This is largely relative to the concentration of buyers i.e. supplier power is increased

when the supplier group is more concentrated than the industry that it serves (Pearce and

Robinson, 1997)

Moreover, gIven recent trends e.g. the acquisition of Sage life by Momentum life,

F edsure and Norwich life acquired by Capital Alliance, Charter Life by Liberty Life as

well as the possible acquisition of Stanlib Asset Management by Liberty life, it is evident

that further consolidation in fmancial services is highly likely and it would be fair to

suggest, that there is a high concentration of suppliers.

However there is currently one independent distributor in South Africa viz Finanzplan

SA. It must be borne in mind, that this channel is part of the larger industry distributors.

This industry consists of approximately 40 000 intermediaries, numerous brokerage

70

However, the experience of Finanzplan SA would suggest that the products of these

providers by themselves are insufficient to attract brokers. This organization holds

contracts with a large number of the product providers, but has found that brokers, who

derive a large amount of their commission from life assurance sales, were unwilling to

contract to them on the basis of product alone. This bears reference to the fact the

different life companies are effectively substitutes for those of the others, and the

bargaining power of specific life assurers would be diluted therefore, if other life

companies were willing to provide their products to the firm at favourable terms.

4.6.1.3 SUPPLIER CONCENTRATION

This is largely relative to the concentration of buyers i.e. supplier power is increased

when the supplier group is more concentrated than the industry that it serves (Pearce and

Robinson, 1997)

Moreover, gIven recent trends e.g. the acquisition of Sage life by Momentum life,

F edsure and Norwich life acquired by Capital Alliance, Charter Life by Liberty Life as

well as the possible acquisition of Stanlib Asset Management by Liberty life, it is evident

that further consolidation in fmancial services is highly likely and it would be fair to

suggest, that there is a high concentration of suppliers.

However there is currently one independent distributor in South Africa viz Finanzplan

SA. It must be borne in mind, that this channel is part of the larger industry distributors.

This industry consists of approximately 40 000 intermediaries, numerous brokerage

70

firms, large numbers of broker consultants, etc. Hence, one can conclude that supplier

concentration is greater than buyer concentration, and is indeed, likely to increase in the

further consolidation in the financial services industry in South Africa.

4.6.1.4 IMPORTANCE OF VOLUME TO SUPPLIERS

Brokers have generated in excess of R2 billion rand in recurring premiums and in excess

of R 15 billion in single premium new business. This constitutes 59% of all individual

business and is therefore the most significant distribution channel in the financial services

industry. While it is clear therefore, that the volume of sales by brokers is of enormous

importance i.e. a supplier, the importance of the volumes of the franchised distributor

would be determined by how much of the sales generated by brokers, it can cause to be

placed via itself.

Moreover, it may increase its volume and therefore its importance, not merely by

capturing a large market share of broker business, but by growing the overall volumes of

business sold by brokers and therefore itself and the life assurance industry.

The International experience as per the United States model suggests that volumes of

business placed via independent third party distribution is of great importance to

suppliers and currently constitutes at least 30% of all new business sold by brokers (Dake

and Mayo, 1996).

71

firms, large numbers of broker consultants, etc. Hence, one can conclude that supplier

concentration is greater than buyer concentration, and is indeed, likely to increase in the

further consolidation in the financial services industry in South Africa.

4.6.1.4 IMPORTANCE OF VOLUME TO SUPPLIERS

Brokers have generated in excess of R2 billion rand in recurring premiums and in excess

of R 15 billion in single premium new business. This constitutes 59% of all individual

business and is therefore the most significant distribution channel in the financial services

industry. While it is clear therefore, that the volume of sales by brokers is of enormous

importance i.e. a supplier, the importance of the volumes of the franchised distributor

would be determined by how much of the sales generated by brokers, it can cause to be

placed via itself.

Moreover, it may increase its volume and therefore its importance, not merely by

capturing a large market share of broker business, but by growing the overall volumes of

business sold by brokers and therefore itself and the life assurance industry.

The International experience as per the United States model suggests that volumes of

business placed via independent third party distribution is of great importance to

suppliers and currently constitutes at least 30% of all new business sold by brokers (Dake

and Mayo, 1996).

71

Hence, whilst there is insufficient information on the existing firms, to determine the

importance of the firm's volwnes to suppliers, it may be safely assumed, in view of the

foregoing, that this volume will be of great importance to life and investment companies

i.e. suppliers.

4.6.1.5. IMP ACT OF INPUTS

This refers to how or whether the inputs provided by the supplier group impacts on the

industry. Given that this industry acts as a distributor of products supplied by the life and

investment industry, it would appear reasonable to conclude that the impact of the

supplier inputs on the industry is extremely high. It is evident, for example, that the

service levels of the supplier industry would directly affect the industry, their product

development capabilities and legislation that affects them.

However, given the fact that other firms within the supplier group may be willing to

provide superior quality service, the ability to switch suppliers does not exist, and hence,

supplier power in this regard is reduced.

It was further ascertained from Finanzplan that brokers canvassed by them was not

willing to change supplier though they held all the contracts with life and investment

companies. This further reduces the bargaining power of individual suppliers as the firm

is not likely to be under any undue pressure to maintain relationships with all life and

investment companies, and is not likely to be unusually dependent on the inputs of any

72

Hence, whilst there is insufficient information on the existing firms, to determine the

importance of the firm's volwnes to suppliers, it may be safely assumed, in view of the

foregoing, that this volume will be of great importance to life and investment companies

i.e. suppliers.

4.6.1.5. IMP ACT OF INPUTS

This refers to how or whether the inputs provided by the supplier group impacts on the

industry. Given that this industry acts as a distributor of products supplied by the life and

investment industry, it would appear reasonable to conclude that the impact of the

supplier inputs on the industry is extremely high. It is evident, for example, that the

service levels of the supplier industry would directly affect the industry, their product

development capabilities and legislation that affects them.

However, given the fact that other firms within the supplier group may be willing to

provide superior quality service, the ability to switch suppliers does not exist, and hence,

supplier power in this regard is reduced.

It was further ascertained from Finanzplan that brokers canvassed by them was not

willing to change supplier though they held all the contracts with life and investment

companies. This further reduces the bargaining power of individual suppliers as the firm

is not likely to be under any undue pressure to maintain relationships with all life and

investment companies, and is not likely to be unusually dependent on the inputs of any

72

particular company. However, given the number of life compames and the stage of

maturity that they are in, that firm is likely to be able to obtain the inputs that it seeks.

Notwithstanding the foregoing, it is significant that 54.86% of all new business sold by

brokers in South Africa is placed with the top FIVE life assurance companies (LOA

website), which would suggest that these FIVE life assurers would wield more bargaining

power than the other smaller less significant players. Therefore for the franchised

distributor to become an established player and gain market share, it would need to have

access to the FIVE major players.

Given the above it would be difficult to draw clear conclusions on the impact of inputs on

the firm, however it would seem fair to suggest that suppliers would, as a result of this

represent at least an average threat.

4.6.1.6 THREAT OF FORWARD INTEGRATION

Suppliers may be increased where there exists the possibility that it may integrate

forward into the industry; if it does not obtain the margins that it seeks (Pearce and

Robinson, 1997; lohnson and Scholes, 2003). Where this possibility exists, it places a

constraint on the industries ability to improve the terms on which it purchases.

The major life and investment companies have large distribution channels consisting of

both agency and broker networks, and a more recent development has been direct sales,

hence it may be deduced that forward integration has already occurred, and the terms on

73

particular company. However, given the number of life compames and the stage of

maturity that they are in, that firm is likely to be able to obtain the inputs that it seeks.

Notwithstanding the foregoing, it is significant that 54.86% of all new business sold by

brokers in South Africa is placed with the top FIVE life assurance companies (LOA

website), which would suggest that these FIVE life assurers would wield more bargaining

power than the other smaller less significant players. Therefore for the franchised

distributor to become an established player and gain market share, it would need to have

access to the FIVE major players.

Given the above it would be difficult to draw clear conclusions on the impact of inputs on

the firm, however it would seem fair to suggest that suppliers would, as a result of this

represent at least an average threat.

4.6.1.6 THREAT OF FORWARD INTEGRATION

Suppliers may be increased where there exists the possibility that it may integrate

forward into the industry; if it does not obtain the margins that it seeks (Pearce and

Robinson, 1997; lohnson and Scholes, 2003). Where this possibility exists, it places a

constraint on the industries ability to improve the terms on which it purchases.

The major life and investment companies have large distribution channels consisting of

both agency and broker networks, and a more recent development has been direct sales,

hence it may be deduced that forward integration has already occurred, and the terms on

73

which the firm purchases from suppliers is already constrained by the cost that are

associated with the various life and investment companies distribution channels. The life

and investment firms may not want to enter into agreements with distributors due to the

cost associated with distribution. From a recent report on the cost implications associated

with distribution channels, 44% of the chief executives indicated that they will use any

effective distribution channel, and hence, the presence of their existing channel will not

be preclude them from entering into agreements with franchised distributors. This is

further supported by the fact that reduced margins, legislative constraints and shrinking

profit will force life and investment companies to seek optimal means of taking a product

to the market, as opposed to relying on a single distribution channel to all markets. A

survey conducted in 1993 found that customers benefit from the presence of multiple

distribution channels.

In the study of chief executives mentioned earlier, the indications are that there would be

willing to contract to such a firm if the concept proved successful. Hence the treat of

forward integration remains high in this regard as well.

From the above it is clear that forward integration already exists in the broader sense and

the threat thereof is very high, in terms of competing with the firm.

4.6.2 POTENTIAL FOR STRATEGIC COLLABORATION

The proviso set by Hamel et al.,(1989) suggests that that firms engaging in collaboration

should seek to enhance the internal skills and technology, but must be careful not to

transfer competitive advantage, and in this regard whilst the firm may seek to collaborate

74

which the firm purchases from suppliers is already constrained by the cost that are

associated with the various life and investment companies distribution channels. The life

and investment firms may not want to enter into agreements with distributors due to the

cost associated with distribution. From a recent report on the cost implications associated

with distribution channels, 44% of the chief executives indicated that they will use any

effective distribution channel, and hence, the presence of their existing channel will not

be preclude them from entering into agreements with franchised distributors. This is

further supported by the fact that reduced margins, legislative constraints and shrinking

profit will force life and investment companies to seek optimal means of taking a product

to the market, as opposed to relying on a single distribution channel to all markets. A

survey conducted in 1993 found that customers benefit from the presence of multiple

distribution channels.

In the study of chief executives mentioned earlier, the indications are that there would be

willing to contract to such a firm if the concept proved successful. Hence the treat of

forward integration remains high in this regard as well.

From the above it is clear that forward integration already exists in the broader sense and

the threat thereof is very high, in terms of competing with the firm.

4.6.2 POTENTIAL FOR STRATEGIC COLLABORATION

The proviso set by Hamel et al.,(1989) suggests that that firms engaging in collaboration

should seek to enhance the internal skills and technology, but must be careful not to

transfer competitive advantage, and in this regard whilst the firm may seek to collaborate

74

with it suppliers for the purpose of mutual benefits in the area of offering advice with

regards to new product development, providing information on the strength of the life and

investment company brand, etc., it must ensure that it does not transfer its core

distribution skills and should prevent direct relationship building between assurer and

broker.

Similarly as discussed previously, the presence of a large degree of trust is central to

sustainable collaboration (Lorenzoni and Baden-Fuller, 1995); hence, the franchised

distributor should seek such relationship only with those companies with whom a degree

of trust has been established.

As determined in the survey that not all brokers were concerned about the number

contracts that the firm held, hence, it may not be necessary to enter into a collaborative

relationship with the supplier.

The potential for the collaboration with some suppliers, whilst yielding mutual benefits

for both the firm and those suppliers with whom it wishes to collaborate, has the

additional benefit for the firm of effectively reducing the bargaining power of the

suppliers, since it would not be dependent on those suppliers in any significant manner.

4.7 POWER OF BUYERS

The bargaining powers of buyers determine the extent to which firms are able to retain

the value that they create for customers, or whether most of this value is retained by the

customer (Porter, 1980; 1985). Therefore within the distribution segment of life and

75

with it suppliers for the purpose of mutual benefits in the area of offering advice with

regards to new product development, providing information on the strength of the life and

investment company brand, etc., it must ensure that it does not transfer its core

distribution skills and should prevent direct relationship building between assurer and

broker.

Similarly as discussed previously, the presence of a large degree of trust is central to

sustainable collaboration (Lorenzoni and Baden-Fuller, 1995); hence, the franchised

distributor should seek such relationship only with those companies with whom a degree

of trust has been established.

As determined in the survey that not all brokers were concerned about the number

contracts that the firm held, hence, it may not be necessary to enter into a collaborative

relationship with the supplier.

The potential for the collaboration with some suppliers, whilst yielding mutual benefits

for both the firm and those suppliers with whom it wishes to collaborate, has the

additional benefit for the firm of effectively reducing the bargaining power of the

suppliers, since it would not be dependent on those suppliers in any significant manner.

4.7 POWER OF BUYERS

The bargaining powers of buyers determine the extent to which firms are able to retain

the value that they create for customers, or whether most of this value is retained by the

customer (Porter, 1980; 1985). Therefore within the distribution segment of life and

75

investment marketing, the bargaining power of buyers would refer to the extent to which

the distributor is able to retain the value created or whether the value is increased by the

broker by demanding high prices (higher commission) which would reduce the

distributors margins. The other demand would be higher service levels at the same price,

and this would increase the distributor costs and therefore reduce its profits.

4.7.1 VALUE CREATION

Central to this notion of who retains most of the value that is created, is the assumption

that value is created by the industry in question. Being a new model in South Africa, its

value has to test. The major benefits that brokers may derive from such a concept are as

follows:

• Access to a large number of life companies

• Single point of service

• Not necessary to manage multiple relationships

• No need to meet the minimum requirements of all companies

Given the singular focus on brokers and it activities, it would seek to increase the volume

of business sold by brokers; it becomes apparent that the firm would create more value

than brokers would currently anticipate.

76

investment marketing, the bargaining power of buyers would refer to the extent to which

the distributor is able to retain the value created or whether the value is increased by the

broker by demanding high prices (higher commission) which would reduce the

distributors margins. The other demand would be higher service levels at the same price,

and this would increase the distributor costs and therefore reduce its profits.

4.7.1 VALUE CREATION

Central to this notion of who retains most of the value that is created, is the assumption

that value is created by the industry in question. Being a new model in South Africa, its

value has to test. The major benefits that brokers may derive from such a concept are as

follows:

• Access to a large number of life companies

• Single point of service

• Not necessary to manage multiple relationships

• No need to meet the minimum requirements of all companies

Given the singular focus on brokers and it activities, it would seek to increase the volume

of business sold by brokers; it becomes apparent that the firm would create more value

than brokers would currently anticipate.

76

4.7.2 CHARACTERISTICS OF BUYER POWER

Porter (1980; 1985) identifies various characteristics that influence the bargaining power

of buyers, and those that are of particular relevance to the industry in question are

discussed further.

4.7.2.1 BUYER CONCENTRATION VS FIRM CONCENTRATION

This is largely relative to the concentration of suppliers i.e. a buyer power is increased

when the buyer group is more concentrated that the industry which supplies it with

inputs. One needs to assess whether the intermediaries in South Africa are more

concentrated that the independent distribution firms that supply them, as well as other

organizations that supply them with contracts e.g. life assurance companies themselves

by way of traditional broker contracts.

As mentioned earlier that there are approximately 40000 intermediaries according to the

Financial Services board. Only a small percentage of these intermediaries belong to a

recognised intermediary association (FP I website, LUASA website) and to a large extent

they operate as individual entities. According to statistics released by Momentum Life

(2005), the great percentages of these brokers are concentrated in the Johannesburg,

Durban and Cape Town areas.

4.7.2.2 BUYER VOLUME

According to Pearce and Robinson, a buyer group is powerful if it purchases in volumes.

Any broking house that contracts to and places it business with firm, and sells a

77

4.7.2 CHARACTERISTICS OF BUYER POWER

Porter (1980; 1985) identifies various characteristics that influence the bargaining power

of buyers, and those that are of particular relevance to the industry in question are

discussed further.

4.7.2.1 BUYER CONCENTRATION VS FIRM CONCENTRATION

This is largely relative to the concentration of suppliers i.e. a buyer power is increased

when the buyer group is more concentrated that the industry which supplies it with

inputs. One needs to assess whether the intermediaries in South Africa are more

concentrated that the independent distribution firms that supply them, as well as other

organizations that supply them with contracts e.g. life assurance companies themselves

by way of traditional broker contracts.

As mentioned earlier that there are approximately 40000 intermediaries according to the

Financial Services board. Only a small percentage of these intermediaries belong to a

recognised intermediary association (FP I website, LUASA website) and to a large extent

they operate as individual entities. According to statistics released by Momentum Life

(2005), the great percentages of these brokers are concentrated in the Johannesburg,

Durban and Cape Town areas.

4.7.2.2 BUYER VOLUME

According to Pearce and Robinson, a buyer group is powerful if it purchases in volumes.

Any broking house that contracts to and places it business with firm, and sells a

77

significant volume of business, and where that constitutes a high percentage of the firm's

total volume of business, may place the firm in a strong bargaining position.

4.7.2.3 BUYER SWITCHING COSTS

This refers to the costs incurred by buyers in moving from one supplier to another, hence

within the context of this industry, it refers to the costs incurred by the broker in moving

from this firm to another firm or directly to the life or investment company.

According to a study conducted by Momentum Life (2004), the following switching costs

were present:

Cost

Need to establish new relationship

Need to promote new company to client

Loss of renewal commission

Loss of service from existing company

Loss of client information

. . Table 4.6 SWltchmg Costs Source: Momentum Life (2004).

Percentage

53.3%

43.35

43.3%

40.0%

36.7%

As discussed earlier that the firm would be able to build in significant switching costs in

terms of the numerous benefits and services that it makes available to brokers including

client management, ongoing training and development, etc. Therefore it may be

78

significant volume of business, and where that constitutes a high percentage of the firm's

total volume of business, may place the firm in a strong bargaining position.

4.7.2.3 BUYER SWITCHING COSTS

This refers to the costs incurred by buyers in moving from one supplier to another, hence

within the context of this industry, it refers to the costs incurred by the broker in moving

from this firm to another firm or directly to the life or investment company.

According to a study conducted by Momentum Life (2004), the following switching costs

were present:

Cost

Need to establish new relationship

Need to promote new company to client

Loss of renewal commission

Loss of service from existing company

Loss of client information

. . Table 4.6 SWltchmg Costs Source: Momentum Life (2004).

Percentage

53.3%

43.35

43.3%

40.0%

36.7%

As discussed earlier that the firm would be able to build in significant switching costs in

terms of the numerous benefits and services that it makes available to brokers including

client management, ongoing training and development, etc. Therefore it may be

78

contended that the presence of switching costs may assist in reducing the bargaining

power of buyers.

4.7.2.4 THREAT OF BACKWARD INTEGRATION

Buyer power is increased when there is the possibility that buyers may integrate

backwards into the industry; if they do not obtain the margins that they seek. Hence,

where this possibility exists, a constraint is placed on the industry's ability to improve the

terms on which it sells to its customers.

As determined earlier that 60% of the brokers surveyed indicated that if broking were no

longer an option, they would explore other activities unrelated to financial services. The

remainder did not indicate what activities they would pursue.

Hence, it may be safe to conclude that the threat of backward integration in the industry

by intermediaries is very low.

4.7.2.5 PRESENCE OF SUBSTITUTE PRODUCTS

This refers to whether buyers (Brokers) have alternative inputs to those provided by the

firm, and clearly, there are significant substitute inputs including ordinary broker

contracts held separately by the broker with each life and investment company, internet

based services to brokers as well as other independent third party distributors.

As discussed in this chapter ordinary or traditional broker contracts offered by life and

investment companies' brokers remain the most significant substitute to the firm's

79

contended that the presence of switching costs may assist in reducing the bargaining

power of buyers.

4.7.2.4 THREAT OF BACKWARD INTEGRATION

Buyer power is increased when there is the possibility that buyers may integrate

backwards into the industry; if they do not obtain the margins that they seek. Hence,

where this possibility exists, a constraint is placed on the industry's ability to improve the

terms on which it sells to its customers.

As determined earlier that 60% of the brokers surveyed indicated that if broking were no

longer an option, they would explore other activities unrelated to financial services. The

remainder did not indicate what activities they would pursue.

Hence, it may be safe to conclude that the threat of backward integration in the industry

by intermediaries is very low.

4.7.2.5 PRESENCE OF SUBSTITUTE PRODUCTS

This refers to whether buyers (Brokers) have alternative inputs to those provided by the

firm, and clearly, there are significant substitute inputs including ordinary broker

contracts held separately by the broker with each life and investment company, internet

based services to brokers as well as other independent third party distributors.

As discussed in this chapter ordinary or traditional broker contracts offered by life and

investment companies' brokers remain the most significant substitute to the firm's

79

offering and continues to account for an enormous amount of business concluded. This

trend was especially significant in a similar experience in the United States.

It was concluded in earlier in this chapter that the Internet did not present a significant

threat of substitution to the industry

It may be concluded that the presence of substitute products IS significant, which

enhances the bargaining power of brokers or buyers.

4.7.2.6 PRODUCT DIFFERENTIATION

Product differentiation, in general, refers to the provision of a product or service that is

perceived by the customer as being of a higher value that offering provided by

competitors (Pearce and Robinson, 1997). In this industry it would be the firms ' ability to

differentiate it's offering in the eyes of the broker it serves.

In terms of differentiating itself from the traditional broker contract, the survey of

independent brokers by Finanzplan (2005) revealed that brokers perceived the firm's

offering as significant in that it offered access to a large number of companies, single

point of sale, not necessary to manage multiple relationships and making it unnecessary

to meet the minimum standards of all companies with whom the transacts business.

Since the focus of the franchised distributor would be on distribution, the firm would be

able to offer superior service, and other benefits focused on the broker, which would

increase the broker' s volume of business.

80

offering and continues to account for an enormous amount of business concluded. This

trend was especially significant in a similar experience in the United States.

It was concluded in earlier in this chapter that the Internet did not present a significant

threat of substitution to the industry

It may be concluded that the presence of substitute products IS significant, which

enhances the bargaining power of brokers or buyers.

4.7.2.6 PRODUCT DIFFERENTIATION

Product differentiation, in general, refers to the provision of a product or service that is

perceived by the customer as being of a higher value that offering provided by

competitors (Pearce and Robinson, 1997). In this industry it would be the firms ' ability to

differentiate it's offering in the eyes of the broker it serves.

In terms of differentiating itself from the traditional broker contract, the survey of

independent brokers by Finanzplan (2005) revealed that brokers perceived the firm's

offering as significant in that it offered access to a large number of companies, single

point of sale, not necessary to manage multiple relationships and making it unnecessary

to meet the minimum standards of all companies with whom the transacts business.

Since the focus of the franchised distributor would be on distribution, the firm would be

able to offer superior service, and other benefits focused on the broker, which would

increase the broker' s volume of business.

80

Finanzplan SA seeks to differentiate itself on the basis of their sound administrative

systems, which they claim is of significant benefit to the broker ( Ms Kelly of Finanzplan

SA, 2006).

Although the new franchised distributor would adopt a business model that is similar to

that of Life and Investment companies', the differentiation would lie in the quality of

people, and its ability to grow its market share not only by attracting brokers, and also

increasing the volumes of business sold by those brokers.

4.7.2.7 IMPACT ON QUALITY OF PERFORMANCE

Currently broker consultants that are employed by the life and investment companies'

service brokers. These broker consultants' recruit and service brokers with the intention

of obtaining a greater market share of the brokers business. The consultant tries to build a

sound relationship and offers superior service with the intention that such a relation will

result in the broker placing a large portion of his business with that consultant. In this

scenario the broker consultant is competing with consultants from other companies.

In the new scenario, the model changes to a single broker consultant, who is employed by

the franchised distributor, who also recruits and services brokers, and in doing so, acts on

behalf of the life and investment companies with whom the franchised distributor has

contracts. Hence, the primary motive of the new distribution firm would be to increase

the volume of business rather that maximizing market share.

81

Finanzplan SA seeks to differentiate itself on the basis of their sound administrative

systems, which they claim is of significant benefit to the broker ( Ms Kelly of Finanzplan

SA, 2006).

Although the new franchised distributor would adopt a business model that is similar to

that of Life and Investment companies', the differentiation would lie in the quality of

people, and its ability to grow its market share not only by attracting brokers, and also

increasing the volumes of business sold by those brokers.

4.7.2.7 IMPACT ON QUALITY OF PERFORMANCE

Currently broker consultants that are employed by the life and investment companies'

service brokers. These broker consultants' recruit and service brokers with the intention

of obtaining a greater market share of the brokers business. The consultant tries to build a

sound relationship and offers superior service with the intention that such a relation will

result in the broker placing a large portion of his business with that consultant. In this

scenario the broker consultant is competing with consultants from other companies.

In the new scenario, the model changes to a single broker consultant, who is employed by

the franchised distributor, who also recruits and services brokers, and in doing so, acts on

behalf of the life and investment companies with whom the franchised distributor has

contracts. Hence, the primary motive of the new distribution firm would be to increase

the volume of business rather that maximizing market share.

81

This model aligns the brokers' objectives to that of the broker consultant i.e. the broker

consultant will focus on increasing the brokers' volume of business rather that focusing

on market share, which is the current scenario. This is likely to have a positive impact on

the performance of its buyers i.e. brokers and that its activities would be tailored for this

purpose i.e. as opposed to simply building sound relationships with and offering high

levels of service to brokers.

The firm and its broker consultants will also benefit the brokers with problem solving,

business advice, motivation, provision of sales ideas, training, assistance with

presentation and counselling. In this manner, the firm would place itself in a strong

bargaining position with its brokers or buyers.

4.7.2.8 IMPACT ON BUYER PROFIT

Where the firm positively impacts upon buyer profit, it increases its bargaining power.

Given the foregoing discussion on how the firm would increase the broker's volume of

business without increasing the broker's costs in any way, it is evident that the firm

would have a material impact on buyer profit and in this way, enhances its bargaining

power.

4.8 SUMMARY

Whilst various dimensions or characteristics of supplier power was studied, the

concentration of suppliers in the distribution industry and the threat of forward

82

This model aligns the brokers' objectives to that of the broker consultant i.e. the broker

consultant will focus on increasing the brokers' volume of business rather that focusing

on market share, which is the current scenario. This is likely to have a positive impact on

the performance of its buyers i.e. brokers and that its activities would be tailored for this

purpose i.e. as opposed to simply building sound relationships with and offering high

levels of service to brokers.

The firm and its broker consultants will also benefit the brokers with problem solving,

business advice, motivation, provision of sales ideas, training, assistance with

presentation and counselling. In this manner, the firm would place itself in a strong

bargaining position with its brokers or buyers.

4.7.2.8 IMPACT ON BUYER PROFIT

Where the firm positively impacts upon buyer profit, it increases its bargaining power.

Given the foregoing discussion on how the firm would increase the broker's volume of

business without increasing the broker's costs in any way, it is evident that the firm

would have a material impact on buyer profit and in this way, enhances its bargaining

power.

4.8 SUMMARY

Whilst various dimensions or characteristics of supplier power was studied, the

concentration of suppliers in the distribution industry and the threat of forward

82

integration posed by the life and investment compames were found to be of great

significance in enhancing there bargaining power.

Notwithstanding the foregoing, it was found that given the lack of material product

differentiation, the presence of substitute inputs in the sense that the products of one life

and investment company constituted a substituted for that of another and the low impact

of inputs, given that the firm could obtain the inputs that it requires from alternative life

and investment companies, strengthened the bargaining position of the firm.

This chapter then proceeded to assess the extent of the bargaining power of buyers, who

are essentially the independent brokers served by the firm. It did this by researching the

characteristics that influence buyer power, and once again found that the most significant

threat posed emanated from life assurers, who essentially provided brokers with an

effective substitute viz. the traditional broker contract.

Notwithstanding the presence of this substitute, the firm was in favourable bargaining

position vis-a-vis buyers on the basis of the low buyer concentration, minimal importance

of individual buyer volume, and the presence of significant buyer switching costs, the

impact of the firm on the quality of the brokers ' performance and the impact on the

broker's profits.

The first four forces of the industry and competitor analysis have been considered, and

the main threat was the life and investment companies. Outside of this the company

remains fairly attractive and well positioned. The remaining force i.e. that of competitive

rivalry will be considered.

83

integration posed by the life and investment compames were found to be of great

significance in enhancing there bargaining power.

Notwithstanding the foregoing, it was found that given the lack of material product

differentiation, the presence of substitute inputs in the sense that the products of one life

and investment company constituted a substituted for that of another and the low impact

of inputs, given that the firm could obtain the inputs that it requires from alternative life

and investment companies, strengthened the bargaining position of the firm.

This chapter then proceeded to assess the extent of the bargaining power of buyers, who

are essentially the independent brokers served by the firm. It did this by researching the

characteristics that influence buyer power, and once again found that the most significant

threat posed emanated from life assurers, who essentially provided brokers with an

effective substitute viz. the traditional broker contract.

Notwithstanding the presence of this substitute, the firm was in favourable bargaining

position vis-a-vis buyers on the basis of the low buyer concentration, minimal importance

of individual buyer volume, and the presence of significant buyer switching costs, the

impact of the firm on the quality of the brokers ' performance and the impact on the

broker's profits.

The first four forces of the industry and competitor analysis have been considered, and

the main threat was the life and investment companies. Outside of this the company

remains fairly attractive and well positioned. The remaining force i.e. that of competitive

rivalry will be considered.

83

4.9 CHARACTERISTICS OF COMPETITIVE RIVALRY

The framework referred to in part 2.3.5. Lists the characteristics that Porter (1985)

identified as underlying the notion of competitive rivalry, and it is these which are now

analysed within the context of the life and investment industry.

4.9.1 INDUSTRY GROWTH

The rate of market growth may have an impact on the industry of competitive rivalry in

an industry and this is illustrated in situations of market growth. An organization may

easily achieve its own growth as a result of general market growth; however, individual

firms in a mature or stable market may only achieve growth at the expense of competing

firms. Hence, mature and declining markets would generally increase the level of rivalry

amongst firms in an industry.

Pearce and Robinson (2003) described the life and investment industry as a mature one,

an assessment that is borne out by statistics released by the Life Offices Association

(2005) and the Association of Collective Investments (2005), which reflected the industry

only grew by 3.45% in the total recurring premium income, with many companies

including the two largest viz. Old Mutual and Sanlam reporting negative growth in new

business. The Financial Services Board of South Africa confirmed that the long-term

industry is under pressure and that certain market segments are approaching saturation

(FSB Annual Report, 2005).

84

4.9 CHARACTERISTICS OF COMPETITIVE RIVALRY

The framework referred to in part 2.3.5. Lists the characteristics that Porter (1985)

identified as underlying the notion of competitive rivalry, and it is these which are now

analysed within the context of the life and investment industry.

4.9.1 INDUSTRY GROWTH

The rate of market growth may have an impact on the industry of competitive rivalry in

an industry and this is illustrated in situations of market growth. An organization may

easily achieve its own growth as a result of general market growth; however, individual

firms in a mature or stable market may only achieve growth at the expense of competing

firms. Hence, mature and declining markets would generally increase the level of rivalry

amongst firms in an industry.

Pearce and Robinson (2003) described the life and investment industry as a mature one,

an assessment that is borne out by statistics released by the Life Offices Association

(2005) and the Association of Collective Investments (2005), which reflected the industry

only grew by 3.45% in the total recurring premium income, with many companies

including the two largest viz. Old Mutual and Sanlam reporting negative growth in new

business. The Financial Services Board of South Africa confirmed that the long-term

industry is under pressure and that certain market segments are approaching saturation

(FSB Annual Report, 2005).

84

Although the industry in question is not, as previously discussed, the life and investment

industry, but rather the life and investment distribution industry, given that the life and

investment distribution is largely a function of the life and investment industry, for

purposes of this study, that its stage of market growth would be a function of that of the

life and investment industry, and therefore may be taken as mature.

Hence, given a mature market stage, it may be deduced that the intensity of competitive

rivalry would be very high.

4.9.2 FIXED COSTS

Although fixed costs will be present vis-a-vis establishing an office infrastructure,

technology costs, staff expenses etc. these would be relatively lower that in most

industries, and indeed, a significant portion of the costs i.e. broker consultants

remuneration, would be variable in nature. This would also be true of other independent

distributors.

However, life and investment companies with established internal divisions that service

brokers are likely to have a relatively high exposure to fixed costs, especially as a result

of the large number of people that they employ, together with their significant

infrastructures and management structures. However, in the recent years, these

companies have indicated a willingness to move away from these fixed costs where

possible, as evidenced by the number of life offices that have downsized or curtailed their

agency operations or introduced franchising options. Hence, it is likely that these

organizations would also seek to reduce the fixed costs related to servicing brokers.

85

Although the industry in question is not, as previously discussed, the life and investment

industry, but rather the life and investment distribution industry, given that the life and

investment distribution is largely a function of the life and investment industry, for

purposes of this study, that its stage of market growth would be a function of that of the

life and investment industry, and therefore may be taken as mature.

Hence, given a mature market stage, it may be deduced that the intensity of competitive

rivalry would be very high.

4.9.2 FIXED COSTS

Although fixed costs will be present vis-a-vis establishing an office infrastructure,

technology costs, staff expenses etc. these would be relatively lower that in most

industries, and indeed, a significant portion of the costs i.e. broker consultants

remuneration, would be variable in nature. This would also be true of other independent

distributors.

However, life and investment companies with established internal divisions that service

brokers are likely to have a relatively high exposure to fixed costs, especially as a result

of the large number of people that they employ, together with their significant

infrastructures and management structures. However, in the recent years, these

companies have indicated a willingness to move away from these fixed costs where

possible, as evidenced by the number of life offices that have downsized or curtailed their

agency operations or introduced franchising options. Hence, it is likely that these

organizations would also seek to reduce the fixed costs related to servicing brokers.

85

The relatively low fixed costs would suggest that competitive rivalry would be low.

4.9.3 PRODUCT DIFFERENCES

In an industry of low product differentiation, customers may switch easily between

suppliers, thereby increasing competitive rivalry. However, Pearce and Robinson qualify

this by claiming that customers may only move easily between suppliers in the absence of

high switching costs

As alluded to earlier there are significant product differences between the traditional

broker contract offered by life and investment companies and that offered by independent

third party distributors, with little incentive or reason for brokers to switch from the third

party distributors to life and investment companies.

However, given that there are little or no differences in the business models used by the

different companies, brokers could switch from one t6 another if they so desired.

However, the potential for switching is adequately offset by the firm's differentiation vis­

a-vis quality of staff and its ability to grow the broker's volume of business. Moreover,

the presence of significant switching costs referred to earlier would also act as a barrier to

brokers switching away from the firm.

Hence, given all of the foregoing, it would appear fair to conclude that the level of rivalry

between those companies providing traditional broker contracts, these being the life and

86

The relatively low fixed costs would suggest that competitive rivalry would be low.

4.9.3 PRODUCT DIFFERENCES

In an industry of low product differentiation, customers may switch easily between

suppliers, thereby increasing competitive rivalry. However, Pearce and Robinson qualify

this by claiming that customers may only move easily between suppliers in the absence of

high switching costs

As alluded to earlier there are significant product differences between the traditional

broker contract offered by life and investment companies and that offered by independent

third party distributors, with little incentive or reason for brokers to switch from the third

party distributors to life and investment companies.

However, given that there are little or no differences in the business models used by the

different companies, brokers could switch from one t6 another if they so desired.

However, the potential for switching is adequately offset by the firm's differentiation vis­

a-vis quality of staff and its ability to grow the broker's volume of business. Moreover,

the presence of significant switching costs referred to earlier would also act as a barrier to

brokers switching away from the firm.

Hence, given all of the foregoing, it would appear fair to conclude that the level of rivalry

between those companies providing traditional broker contracts, these being the life and

86

investment companies themselves, on the basis of product differences, is very low whilst

the rivalry between the firm and other independent third party distributors is low to

average.

4.9.4 DIVERSITY OF COMPETITORS

Pearce and Robinson suggest that rivalry is heightened when competitors are diverse in

"strategies, origins and personalities." They deduce that this diversity causes them to

develop very different ideas on how to compete in the industry, with the result that they

continually "run head-on into each other".

The main competitors in the industry are those companies that have traditional broker

divisions that service brokers employer similar strategies in attempting to capture the

maximum volume of business sold by brokers i.e. they employ broker consultants to

recruit, build relationships with and service these brokers.

Although no tests were conducted to assess the diversity in personalities of competitors, it

would appear reasonable to suggest that given the similarities in their backgrounds and

the fact that they would have entered the life and investment industry, on average through

similar recruitment and selection procedures, there is not likely to be significant variance

in personalities. Hence, competitive rivalry as a result of diversity of competitors is

assumed to be very low.

87

investment companies themselves, on the basis of product differences, is very low whilst

the rivalry between the firm and other independent third party distributors is low to

average.

4.9.4 DIVERSITY OF COMPETITORS

Pearce and Robinson suggest that rivalry is heightened when competitors are diverse in

"strategies, origins and personalities." They deduce that this diversity causes them to

develop very different ideas on how to compete in the industry, with the result that they

continually "run head-on into each other".

The main competitors in the industry are those companies that have traditional broker

divisions that service brokers employer similar strategies in attempting to capture the

maximum volume of business sold by brokers i.e. they employ broker consultants to

recruit, build relationships with and service these brokers.

Although no tests were conducted to assess the diversity in personalities of competitors, it

would appear reasonable to suggest that given the similarities in their backgrounds and

the fact that they would have entered the life and investment industry, on average through

similar recruitment and selection procedures, there is not likely to be significant variance

in personalities. Hence, competitive rivalry as a result of diversity of competitors is

assumed to be very low.

87

4.9.5 EXIT BARRIER

Industries in which there are high exit barrier generally experience a high intensity of

rivalry, as a consequence of the likelihood of a persistence of excess capacity, and

therefore increased competition (Johnson and Scholes, 1999).

The main competitors viz. Life and investment companies with broker divisions face

different levels of exit barriers for various reasons.

Life and investment companies which offer traditional broker contracts generally have

well established internal broker divisions which employ several hundred staff including

broker consultants, managers and support staff, many of whom have been with these

companies over extended periods of time. Hence, there would be significant exit barriers

for these companies ' vis-a.-vis retrenchment costs or redeployment costs. The negative

publicity that accompanies such retrenchments or redeployments may also impose

significant costs on the company.

In addition to the actual staff costs, these companies would also have housed these

employees in good quality offices and there is likelihood therefore, of costs associated

with the early termination of leases.

An franchised distributor is unlikely to face similar exit barriers. They would not employ

large numbers of staff and are unlikely therefore, to be faced with significant

retrenchment expenses. Moreover, they tend to use less office space, concentrating on the

main centres rather than being countrywide.

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4.9.5 EXIT BARRIER

Industries in which there are high exit barrier generally experience a high intensity of

rivalry, as a consequence of the likelihood of a persistence of excess capacity, and

therefore increased competition (Johnson and Scholes, 1999).

The main competitors viz. Life and investment companies with broker divisions face

different levels of exit barriers for various reasons.

Life and investment companies which offer traditional broker contracts generally have

well established internal broker divisions which employ several hundred staff including

broker consultants, managers and support staff, many of whom have been with these

companies over extended periods of time. Hence, there would be significant exit barriers

for these companies ' vis-a.-vis retrenchment costs or redeployment costs. The negative

publicity that accompanies such retrenchments or redeployments may also impose

significant costs on the company.

In addition to the actual staff costs, these companies would also have housed these

employees in good quality offices and there is likelihood therefore, of costs associated

with the early termination of leases.

An franchised distributor is unlikely to face similar exit barriers. They would not employ

large numbers of staff and are unlikely therefore, to be faced with significant

retrenchment expenses. Moreover, they tend to use less office space, concentrating on the

main centres rather than being countrywide.

88

Given the foregoing, it may be concluded that the level of rivalry from the life and

investment companies as a result of their high exit barriers is likely to be high, whilst that

from other third distributors is likely to low.

4.10. SUMMARY

As discussed in the other forces, the characteristics that underlie this force also assessed

the intensity of competitive rivalry. The research suggested that although the industry is

in a mature stage of growth and that high exit barrier were present in the case of the

established life and investment industry, the intensity of rivalry was generally low. This

was established by the low operating costs generally prevalent in the industry or where

fixed costs were high, they were characterized by a willingness to reduce them,

significant product difference between traditional broker contracts and the offering of a

third party distributor and low diversity amongst competitors.

Although product similarities were observed between the new distributor and its more

direct competitors i.e. Finanzplan SA, the presence of switching costs and other

differentiating factors ensure that competitive rivalry remains low.

Having discussed all five forces within the context of life and investment distribution in

South Africa. The next chapter will seek to draw conclusion and make recommendations

where appropriate.

89

Given the foregoing, it may be concluded that the level of rivalry from the life and

investment companies as a result of their high exit barriers is likely to be high, whilst that

from other third distributors is likely to low.

4.10. SUMMARY

As discussed in the other forces, the characteristics that underlie this force also assessed

the intensity of competitive rivalry. The research suggested that although the industry is

in a mature stage of growth and that high exit barrier were present in the case of the

established life and investment industry, the intensity of rivalry was generally low. This

was established by the low operating costs generally prevalent in the industry or where

fixed costs were high, they were characterized by a willingness to reduce them,

significant product difference between traditional broker contracts and the offering of a

third party distributor and low diversity amongst competitors.

Although product similarities were observed between the new distributor and its more

direct competitors i.e. Finanzplan SA, the presence of switching costs and other

differentiating factors ensure that competitive rivalry remains low.

Having discussed all five forces within the context of life and investment distribution in

South Africa. The next chapter will seek to draw conclusion and make recommendations

where appropriate.

89

CHAPTERS

RECOMMENDATIONS AND CONCLUSIONS

5.1 INTRODUCTION

The researcher, who is employed in the investment industry, perceived that the existing

methods of distributing life and investment products was inefficient and it was decided to

research the issue to determine whether a more suitable cost effective method could be

developed.

The purpose of the study was to assess the attractiveness of an independent third party

distributor of life and investment products in South Africa by applying Porter's Five

Forces Model and industry competitor analysis the study sought to highlight those issues

that the firm should pay special attention to in its efforts to build a competitive business.

The model below was envisaged as the working framework for the research.

The frame work that was set at inception and as illustrated below sought to demonstrate

that companies which spending large sums of money on the marketing of its products

through its intermediaries may now have the option of moving the distribution to an

independent distributor. This study sought to illustrate this through interviews and

questionnaires that was target to the different stakeholders in the life and investment

industry.

90

CHAPTERS

RECOMMENDATIONS AND CONCLUSIONS

5.1 INTRODUCTION

The researcher, who is employed in the investment industry, perceived that the existing

methods of distributing life and investment products was inefficient and it was decided to

research the issue to determine whether a more suitable cost effective method could be

developed.

The purpose of the study was to assess the attractiveness of an independent third party

distributor of life and investment products in South Africa by applying Porter's Five

Forces Model and industry competitor analysis the study sought to highlight those issues

that the firm should pay special attention to in its efforts to build a competitive business.

The model below was envisaged as the working framework for the research.

The frame work that was set at inception and as illustrated below sought to demonstrate

that companies which spending large sums of money on the marketing of its products

through its intermediaries may now have the option of moving the distribution to an

independent distributor. This study sought to illustrate this through interviews and

questionnaires that was target to the different stakeholders in the life and investment

industry.

90

This saving that the life and investment companies will earn can be ploughed back into

client centric product development. This view was endorsed by company executives who

stated that the distribution of its products only formed about 11 % of its total business.

Present Model Proposed Model Example

1

Figure 1.1. Proposed Model on Franchised Distributor (2006)

As discussed in chapter 1 of the study the distribution of life and investment products is

through direct agents that are in the full time employment of life and investment

companies' .

In chapter 4 the competencies required by the broker fraternity were examined, and it was

shown that brokers required knowledgeable consultants that will help in increasing the

91

This saving that the life and investment companies will earn can be ploughed back into

client centric product development. This view was endorsed by company executives who

stated that the distribution of its products only formed about 11 % of its total business.

Present Model Proposed Model Example

1

Figure 1.1. Proposed Model on Franchised Distributor (2006)

As discussed in chapter 1 of the study the distribution of life and investment products is

through direct agents that are in the full time employment of life and investment

companies' .

In chapter 4 the competencies required by the broker fraternity were examined, and it was

shown that brokers required knowledgeable consultants that will help in increasing the

91

brokers business rather than becoming defensive towards the company they represent.

This implies that firms need staff that know the range of products, know the laws

governing their industry and sales practices and that they fully assess the needs of the

prospective clients in order that they are able to sell himlher what he/she needs. Often in

the past brokers sold policies that were less than ideal for the client but generated good

income for the brokers

5.2 INDUSTRY BOUNDARIES

The industry in which the firm would operate was defmed as being the distribution

segment of the life and investment sector. The relevance of this is to understand who the

major competitors are, and to separate the competitors (other brokers and agents) from

the supplier (The Life Assurer), notwithstanding the fact that in some instances both

competitor and supplier may belong to the same organization e.g. where a life company,

which operates a broker division, agrees to the firm distributing its products via brokers,

it follows that the life company would act as product provider on the one hand, whilst its

broker division would be a direct competitor on the other hand.

5.2.1 RESEARCH ISSUE

The objective of the study was to apply the Five Force Model to a company seeking to

enter the life and investment business as a new entrant specialising in the distribution

segment only. This would ensure that the life and investment company would stick to its

core competences rather than having internal competition.

92

brokers business rather than becoming defensive towards the company they represent.

This implies that firms need staff that know the range of products, know the laws

governing their industry and sales practices and that they fully assess the needs of the

prospective clients in order that they are able to sell himlher what he/she needs. Often in

the past brokers sold policies that were less than ideal for the client but generated good

income for the brokers

5.2 INDUSTRY BOUNDARIES

The industry in which the firm would operate was defmed as being the distribution

segment of the life and investment sector. The relevance of this is to understand who the

major competitors are, and to separate the competitors (other brokers and agents) from

the supplier (The Life Assurer), notwithstanding the fact that in some instances both

competitor and supplier may belong to the same organization e.g. where a life company,

which operates a broker division, agrees to the firm distributing its products via brokers,

it follows that the life company would act as product provider on the one hand, whilst its

broker division would be a direct competitor on the other hand.

5.2.1 RESEARCH ISSUE

The objective of the study was to apply the Five Force Model to a company seeking to

enter the life and investment business as a new entrant specialising in the distribution

segment only. This would ensure that the life and investment company would stick to its

core competences rather than having internal competition.

92

The study also sought as its objective, that the distribution of the life and investment

products could be outsourced with little or no impact on the companies' brand being

affected in any way. The study was centred on the five key components of Porters Five

Forces Model, which is as follows and the fmdings, conclusions and recommendation for

each are discussed one by one and are based on the interview and literature research

phases

• The entry of new competitors:

• The bargaining power of supplier:

• The bargaining power of buyers:

• The threat of substitutes:

• Competitive rivalry:

The study revealed that by outsourcing the distribution to an independent third party as

envisaged, the profitability of the organization would improve; client retention and client

management will improve. Most importantly, the company will be able to focus on

product development to increase its market share.

Though volumes of sales has increased in recent year, it clear that the life and investment

companies are struggling with increasing sales on the one hand and defending their

products on the other hand. The confidence with which these products were sold in the

past was agent centric. The retention of business was a secondary function to making

high sales.

93

The study also sought as its objective, that the distribution of the life and investment

products could be outsourced with little or no impact on the companies' brand being

affected in any way. The study was centred on the five key components of Porters Five

Forces Model, which is as follows and the fmdings, conclusions and recommendation for

each are discussed one by one and are based on the interview and literature research

phases

• The entry of new competitors:

• The bargaining power of supplier:

• The bargaining power of buyers:

• The threat of substitutes:

• Competitive rivalry:

The study revealed that by outsourcing the distribution to an independent third party as

envisaged, the profitability of the organization would improve; client retention and client

management will improve. Most importantly, the company will be able to focus on

product development to increase its market share.

Though volumes of sales has increased in recent year, it clear that the life and investment

companies are struggling with increasing sales on the one hand and defending their

products on the other hand. The confidence with which these products were sold in the

past was agent centric. The retention of business was a secondary function to making

high sales.

93

The study envisages a separation of the functions with life and investment companies'

focusing on the development of customer focused, and the distribution of these products

to independent brokers would be better dealt with by a specialist. In this instance it will

be the third party distributor.

5.3 THE THREAT OF ENTRY

Having defined the threat of entry as the probability of new firms entering an industry

and competing away the value created by the industry, the research went on to identify

the sources of those new entrants, who were assumed to come from one of three areas viz

related product markets, firms up and down the value chain of firms with related

competencies.

It was concluded that those responsible for the training of intermediaries i.e. either

employees of life and investment companies who specialize in training of intermediaries

or those companies to which training of intermediaries is outsourced, as well as providers

of information technology services to life and investment industry, presented a high treat

of entry.

It was further concluded that the potential entrants would need to take certain observable

actions in starting up their businesses and these included contracting with life and

investment companies, attracting broker consultants into their employ, attracting brokers

to contract with them, creating an office infrastructure and making investments in

technology.

94

The study envisages a separation of the functions with life and investment companies'

focusing on the development of customer focused, and the distribution of these products

to independent brokers would be better dealt with by a specialist. In this instance it will

be the third party distributor.

5.3 THE THREAT OF ENTRY

Having defined the threat of entry as the probability of new firms entering an industry

and competing away the value created by the industry, the research went on to identify

the sources of those new entrants, who were assumed to come from one of three areas viz

related product markets, firms up and down the value chain of firms with related

competencies.

It was concluded that those responsible for the training of intermediaries i.e. either

employees of life and investment companies who specialize in training of intermediaries

or those companies to which training of intermediaries is outsourced, as well as providers

of information technology services to life and investment industry, presented a high treat

of entry.

It was further concluded that the potential entrants would need to take certain observable

actions in starting up their businesses and these included contracting with life and

investment companies, attracting broker consultants into their employ, attracting brokers

to contract with them, creating an office infrastructure and making investments in

technology.

94

The reduction in the threat of entry was also considered, and it was found that the

presence of economies of scale in the industry would ensure that firms that established

themselves early would enjoy an advantage over the later entrants, which reduce the

threat of entry. The new distribution firm would be advised to establish itself early to take

advantage of the market conditions.

Branding was considered to be important, as well as switching costs was found to be

important in defending against the threat of entry, as well as other threats, which was

supported by both broker managers and independent brokers. It is recommended that the

firm seeks to add value to the brokers business by building strong relationships with

dedicated broker consultants, training and development, creating compatible information

technology systems and taking over a large share of the brokers administration and client

management, thereby creating very high switching costs. Access to distribution was also

viewed, as an important factor in reducing the threat of entry in that once a fair share of

brokers was contracted to the independent third party distributor and retained through

high switching costs entry to the industry would appear unattractive.

5.3.1 FINDINGS

On the whole it may be concluded that whilst the various defences that the firm may raise

is likely to have a significant impact in reducing the threat of entry posed by firms in

related product market, the threat presented by firms up the value chain within the life

and investment companies remains very high.

95

The reduction in the threat of entry was also considered, and it was found that the

presence of economies of scale in the industry would ensure that firms that established

themselves early would enjoy an advantage over the later entrants, which reduce the

threat of entry. The new distribution firm would be advised to establish itself early to take

advantage of the market conditions.

Branding was considered to be important, as well as switching costs was found to be

important in defending against the threat of entry, as well as other threats, which was

supported by both broker managers and independent brokers. It is recommended that the

firm seeks to add value to the brokers business by building strong relationships with

dedicated broker consultants, training and development, creating compatible information

technology systems and taking over a large share of the brokers administration and client

management, thereby creating very high switching costs. Access to distribution was also

viewed, as an important factor in reducing the threat of entry in that once a fair share of

brokers was contracted to the independent third party distributor and retained through

high switching costs entry to the industry would appear unattractive.

5.3.1 FINDINGS

On the whole it may be concluded that whilst the various defences that the firm may raise

is likely to have a significant impact in reducing the threat of entry posed by firms in

related product market, the threat presented by firms up the value chain within the life

and investment companies remains very high.

95

5.4 THE THREAT OF SUBSTITUTES

The threat was defined as the extent to which profit was constrained by the presence of

other products or services that meet the same buyer needs, in assessing the extent of the

threat, the different forms of substitution was considered.

The researcher also considered those factors that the firm could use to reduce the threat of

substitution, bearing in mind that the major threat of substitution comes from the

traditional broker contract offered to the broker by the life assurance and investment

companies. The established life and investment companies will be able to sustain

regulated rates of commission to the established inflows of new business.

The first factor that was relating to the price- performance of substitutes it was concluded

that the firm offered a superior price performance trade off vis-a-vis possible substitutes

including traditional broker contracts. However the international experience suggested

that this in itself was not likely to significantly reduce the threat of substitution posed by

traditional broker contracts.

Other factors that were discussed included switching costs, which, as with the entry,

viewed as significant but assumed that the firm would be able to attract sufficient brokers

in the first instance, since switching costs are only of relevance to those brokers who are

already contracted to the firm. Hence, this also does not fully assist in curtailing the threat

posed by traditional broker contracts, in that the main difficulty with this substitute is that

96

5.4 THE THREAT OF SUBSTITUTES

The threat was defined as the extent to which profit was constrained by the presence of

other products or services that meet the same buyer needs, in assessing the extent of the

threat, the different forms of substitution was considered.

The researcher also considered those factors that the firm could use to reduce the threat of

substitution, bearing in mind that the major threat of substitution comes from the

traditional broker contract offered to the broker by the life assurance and investment

companies. The established life and investment companies will be able to sustain

regulated rates of commission to the established inflows of new business.

The first factor that was relating to the price- performance of substitutes it was concluded

that the firm offered a superior price performance trade off vis-a-vis possible substitutes

including traditional broker contracts. However the international experience suggested

that this in itself was not likely to significantly reduce the threat of substitution posed by

traditional broker contracts.

Other factors that were discussed included switching costs, which, as with the entry,

viewed as significant but assumed that the firm would be able to attract sufficient brokers

in the first instance, since switching costs are only of relevance to those brokers who are

already contracted to the firm. Hence, this also does not fully assist in curtailing the threat

posed by traditional broker contracts, in that the main difficulty with this substitute is that

96

brokers, as result of holding existing contracts of this nature, do not join the firm in the

first instance.

Although no clear conclusion could be drawn on the propensity of brokers to substitute,

the conditions under which they would do so if the attractiveness of the new firm were

greater than what they enjoyed currently, e.g. better products better technology.

5.4.1 FINDING

In summary the most significant threat of substitution is that posed by traditional broker

contracts offered directly to brokers by life assurers and investment companies'. Whilst

the presence of superior price performance trade off and switching cost may help to some

extent, it is concluded that this did not reduce the threat sufficiently and hence the threat

of substitution form traditional broker contracts remains high.

5.5 POWER OF SUPPILERS

It has been stated that given the ability to determine prices and quality of inputs, suppliers

play significant role in the determination of where value is distributed in an industry.

Although no clear conclusions could be drawn in respect of product differentiation of

suppliers it was found that 85.14% of all new business sold in South Africa is placed with

the 5 major companies' (LOA website), suggesting that there are differences between

these and the other companies in the life and investment companies.

97

brokers, as result of holding existing contracts of this nature, do not join the firm in the

first instance.

Although no clear conclusion could be drawn on the propensity of brokers to substitute,

the conditions under which they would do so if the attractiveness of the new firm were

greater than what they enjoyed currently, e.g. better products better technology.

5.4.1 FINDING

In summary the most significant threat of substitution is that posed by traditional broker

contracts offered directly to brokers by life assurers and investment companies'. Whilst

the presence of superior price performance trade off and switching cost may help to some

extent, it is concluded that this did not reduce the threat sufficiently and hence the threat

of substitution form traditional broker contracts remains high.

5.5 POWER OF SUPPILERS

It has been stated that given the ability to determine prices and quality of inputs, suppliers

play significant role in the determination of where value is distributed in an industry.

Although no clear conclusions could be drawn in respect of product differentiation of

suppliers it was found that 85.14% of all new business sold in South Africa is placed with

the 5 major companies' (LOA website), suggesting that there are differences between

these and the other companies in the life and investment companies.

97

The presence of possible substitute inputs were considered and found not to be

significant, or rather than alternative providers of retail financial services products e.g.

Unit trust management companies. However a large number of life assurers ensured that

supplier power was limited since the product of the different companies acted as

substitutes for each other. This was entrenched by a survey conducted by FinanzPlan SA.

(2003) of independent brokers were it was found that they would be willing to contract

with the firm if it provided access to a limited number of life and investment offices.

Whilst there was clear evidence that the volume of business sold by brokers is off

importance to the life assurance and investment industries and is likely to become of

additional importance in the future, given the recent growth trends, the importance of the

firms volume to the life assurance and investment industries would be a function of its

own effectiveness and essentially, what share of the total amount of business sold by

brokers it can cause to be placed via itself. International experience does suggest that the

firm will be able to generate volumes that are sufficient to cause it to become of

importance to its suppliers.

However given the stage of maturity of the life assurance and investment industries

currently finds itself, and the intensity of the competition between the firms in these

industries, it is likely that even among the five most competitive companies, the third

party distributors would be able to obtain the required input, thereby reducing the power

of suppliers in this regard to no more that average.

98

The presence of possible substitute inputs were considered and found not to be

significant, or rather than alternative providers of retail financial services products e.g.

Unit trust management companies. However a large number of life assurers ensured that

supplier power was limited since the product of the different companies acted as

substitutes for each other. This was entrenched by a survey conducted by FinanzPlan SA.

(2003) of independent brokers were it was found that they would be willing to contract

with the firm if it provided access to a limited number of life and investment offices.

Whilst there was clear evidence that the volume of business sold by brokers is off

importance to the life assurance and investment industries and is likely to become of

additional importance in the future, given the recent growth trends, the importance of the

firms volume to the life assurance and investment industries would be a function of its

own effectiveness and essentially, what share of the total amount of business sold by

brokers it can cause to be placed via itself. International experience does suggest that the

firm will be able to generate volumes that are sufficient to cause it to become of

importance to its suppliers.

However given the stage of maturity of the life assurance and investment industries

currently finds itself, and the intensity of the competition between the firms in these

industries, it is likely that even among the five most competitive companies, the third

party distributors would be able to obtain the required input, thereby reducing the power

of suppliers in this regard to no more that average.

98

The most significant threat posed by suppliers was found to be the threat of forward

integration, an alternative that it may elect to exercise in the event that it does not obtain

the margins that it seeks. Majority of life and investment offices already have established

distribution channels and may therefore be treated as already having integrated into the

industry, however, there is a high likely hood that they will also adopt the business model

being espoused in this study.

5.5.1 FINDING

In summary suppliers hold significant bargaining power due to their greater

concentration, which is likely to become further entrenched with the increased

consolidation within the life assurance industry. However, if the firm is able to establish

itself quickly and gain significant market share of the broker market this power may be

significantly reduced.

5.6 POWER OF BUYERS

This threat exists due to buyers being in a strong bargaining position and being able to

retain much of the value created by the third party distributor. The bargaining power

buyers, who in this case would be brokers was assessed.

Brokers were found in the first instance to be less concentrated than the firms that supply

them i.e. either life assurers or other suppliers of financial product Hence, their

bargaining power in this regard is very low.

99

The most significant threat posed by suppliers was found to be the threat of forward

integration, an alternative that it may elect to exercise in the event that it does not obtain

the margins that it seeks. Majority of life and investment offices already have established

distribution channels and may therefore be treated as already having integrated into the

industry, however, there is a high likely hood that they will also adopt the business model

being espoused in this study.

5.5.1 FINDING

In summary suppliers hold significant bargaining power due to their greater

concentration, which is likely to become further entrenched with the increased

consolidation within the life assurance industry. However, if the firm is able to establish

itself quickly and gain significant market share of the broker market this power may be

significantly reduced.

5.6 POWER OF BUYERS

This threat exists due to buyers being in a strong bargaining position and being able to

retain much of the value created by the third party distributor. The bargaining power

buyers, who in this case would be brokers was assessed.

Brokers were found in the first instance to be less concentrated than the firms that supply

them i.e. either life assurers or other suppliers of financial product Hence, their

bargaining power in this regard is very low.

99

Similarly it was concluded that individual buyers or buyer groups did not purchase in

volumes that were especially significant, and therefore, buyer bargaining power in this

regard is very low.

Buyer switching costs, as discussed earlier were found to be high and the firm is also

encouraged to introduce other switching costs were appropriate, and this also serves to

keep the bargaining power of buyers low.

The other significant factor that enhances the bargaining power of brokers was found to

be the presence of substitute products viz. traditional broker contracts which discussed

earlier, cannot be counted.

Product differentiation, its impact on the quality of the brokers' performance and its

impact on the brokers' performance were all found to be favourable and therefore also

reduced the bargaining power of buyers.

5.6.1 FINDINGS

In summary, whereas the firm enjoys relatively more bargaining power than buyers, the

single area were buyer power is enhanced is especially significant, in that it is the threat

of substitute products, these products being the traditional broker contracts offered by life

assurance companies. It is also the one area that remains a threat consistently through the

previous three factors.

100

Similarly it was concluded that individual buyers or buyer groups did not purchase in

volumes that were especially significant, and therefore, buyer bargaining power in this

regard is very low.

Buyer switching costs, as discussed earlier were found to be high and the firm is also

encouraged to introduce other switching costs were appropriate, and this also serves to

keep the bargaining power of buyers low.

The other significant factor that enhances the bargaining power of brokers was found to

be the presence of substitute products viz. traditional broker contracts which discussed

earlier, cannot be counted.

Product differentiation, its impact on the quality of the brokers' performance and its

impact on the brokers' performance were all found to be favourable and therefore also

reduced the bargaining power of buyers.

5.6.1 FINDINGS

In summary, whereas the firm enjoys relatively more bargaining power than buyers, the

single area were buyer power is enhanced is especially significant, in that it is the threat

of substitute products, these products being the traditional broker contracts offered by life

assurance companies. It is also the one area that remains a threat consistently through the

previous three factors.

100

5.7 COMPETITIVE RIVALRY

The intensity of rivalry within the industry was also assessed by looking at the

characteristics of competitive rivalry.

It was found that the life assurance and investment companies' is in a mature stage of

industry growth and although the industry being analysed, was defined as being only a

segment of the total life assurance and investment industry, it was assumed that the

distribution segment of the life assurance and investment sector would follow a similar

stage of industry growth as the life assurance and investment industry itself, and hence

may also be treated as mature. Given this mature market stage, the intensity of rivalry, on

the basis of this alone, may be assumed to be very high.

Fixed costs were also seen to be a factor in assessing the intensity of rivalry in an

industry and in this instance, given the relatively low fixed costs, and in the cause of the

established life assurance and investment companies, their willingness of late to reduce

their fixed cost exposure, caused this study to conclude that competitive rivalry, on the

basis of this factor alone is low.

Product differences were assessed from both the perspective of the firm vis-a.-vis

traditional broker contracts and vis-a.-vis other independent third party distributors.

Significant product differences were found to exist when comparisons are made to

traditional broker contracts offered directly to the broker by life assurance and investment

companies, and therefore rivalry as a result thereof is very low. Although there are few

-11 6093

101

5.7 COMPETITIVE RIVALRY

The intensity of rivalry within the industry was also assessed by looking at the

characteristics of competitive rivalry.

It was found that the life assurance and investment companies' is in a mature stage of

industry growth and although the industry being analysed, was defined as being only a

segment of the total life assurance and investment industry, it was assumed that the

distribution segment of the life assurance and investment sector would follow a similar

stage of industry growth as the life assurance and investment industry itself, and hence

may also be treated as mature. Given this mature market stage, the intensity of rivalry, on

the basis of this alone, may be assumed to be very high.

Fixed costs were also seen to be a factor in assessing the intensity of rivalry in an

industry and in this instance, given the relatively low fixed costs, and in the cause of the

established life assurance and investment companies, their willingness of late to reduce

their fixed cost exposure, caused this study to conclude that competitive rivalry, on the

basis of this factor alone is low.

Product differences were assessed from both the perspective of the firm vis-a.-vis

traditional broker contracts and vis-a.-vis other independent third party distributors.

Significant product differences were found to exist when comparisons are made to

traditional broker contracts offered directly to the broker by life assurance and investment

companies, and therefore rivalry as a result thereof is very low. Although there are few

-11 6093

101

product differences between the insurance companies, the presence of high switching

costs ensures that rivalry remains low to average.

Little or no diversity was found to exist among competitors, further contributing to a very

low level of rivalry within the industry.

Finally, exit barriers were reviewed and found to be high in the case of established life

offices and investment companies and low in the cause of other independent third party

distributors with the resultant conclusion that the level of rivalry that may be expected

from life and investment companies is high, whilst that from other independent third

party distributors is low.

Hence, the intensity of rivalry is increased by the mature stage of growth in the industry,

otherwise it remains relatively low.

5.8 CONCLUSION

Given the foregoing, it is contended that whilst the independent distributor enjoys a

favourable or attractive position vis-a-vis all five of the force model as envisaged by

Porter, the threat posed by the established life and investment companies remains very

significant from various perspectives.

It also appeared that there was little that the firm can do to reduce the threat posed by

these companies. However, it may enhance its own position by the rapid accumulation of

102

product differences between the insurance companies, the presence of high switching

costs ensures that rivalry remains low to average.

Little or no diversity was found to exist among competitors, further contributing to a very

low level of rivalry within the industry.

Finally, exit barriers were reviewed and found to be high in the case of established life

offices and investment companies and low in the cause of other independent third party

distributors with the resultant conclusion that the level of rivalry that may be expected

from life and investment companies is high, whilst that from other independent third

party distributors is low.

Hence, the intensity of rivalry is increased by the mature stage of growth in the industry,

otherwise it remains relatively low.

5.8 CONCLUSION

Given the foregoing, it is contended that whilst the independent distributor enjoys a

favourable or attractive position vis-a-vis all five of the force model as envisaged by

Porter, the threat posed by the established life and investment companies remains very

significant from various perspectives.

It also appeared that there was little that the firm can do to reduce the threat posed by

these companies. However, it may enhance its own position by the rapid accumulation of

102

market share, which would cause it to become a player of enormous importance to the

life and investment companies, which in turn would lead to a more equitable bargaining

position.

Given that fact that the independent distributor enjoys a favourable position, it is the

conclusion of this study that the firm remains attractive and should proceed in

establishing its business, but whilst remaining sensitive to the threats posed by life and

investment companies and therefore, formulating strategies to reduce or cope such

threats. Some of the actions that the independent distributor can take are as follows:

• Move early to take advantage of economies of scale and entrench itself in the

market place, therefore also attracting the premier brokers within the industry;

• Build a strong brand;

• Introduce significant switching costs;

• Attracting the best broker consultants within the industry, including those with

strong existing relationships with brokers, as these are likely to follow their

consultants to the new company;

• Promote the superior price- performance trade-off of the firm;

• Enter into collaborate agreements with selected suppliers;

It is suggested that the successful implementation of these recommendations will enhance

the new firm' s position, thereby making its business more attractive and increasing its

chances of success.

103

market share, which would cause it to become a player of enormous importance to the

life and investment companies, which in turn would lead to a more equitable bargaining

position.

Given that fact that the independent distributor enjoys a favourable position, it is the

conclusion of this study that the firm remains attractive and should proceed in

establishing its business, but whilst remaining sensitive to the threats posed by life and

investment companies and therefore, formulating strategies to reduce or cope such

threats. Some of the actions that the independent distributor can take are as follows:

• Move early to take advantage of economies of scale and entrench itself in the

market place, therefore also attracting the premier brokers within the industry;

• Build a strong brand;

• Introduce significant switching costs;

• Attracting the best broker consultants within the industry, including those with

strong existing relationships with brokers, as these are likely to follow their

consultants to the new company;

• Promote the superior price- performance trade-off of the firm;

• Enter into collaborate agreements with selected suppliers;

It is suggested that the successful implementation of these recommendations will enhance

the new firm' s position, thereby making its business more attractive and increasing its

chances of success.

103

5.9 SHORTCOMING OF THE STUDY

The most important assumption of the model, and therefore the study, is found that the

industry is the primary arena in which competition occurs and in addition to being

questionable, the boundaries are being blurred. Notwithstanding this, the view of the

industry as being central to competitive strategy remains one that is widely held and

hence, a deliberate attempt was made to define the industry being analysed as accurately

as possible.

Though not a short coming writers are critical of relevance of the Five Forces' as an

analytical tool and its value to business is brought into question. These writers suggest

that the framework works well in conditions of stability or where there is a fair amount of

certainty but not in other situations. However, these writers do not offer any viable

alternative for analysis and it is contended that the Five Forces Model can be successfully

applied to the industry.

Another shortcoming, which Gordon (1997) recognIzes and quotes Porter's

acknowledgement, is that the Five Forces model does not recogmze the role of

government in shaping competition. This is a significant shortcoming; especially in the

presence of the role that legislation is to play in redefining the life and investment

industry in South Africa over the next few months. Such legislation will have a profound

impact on the shape of the industry going into the next few months. Clearly though no

business can operate without taking into account legislation and this is more so in the

financial services sector. In the light of this it is argued that any well run company would

104

5.9 SHORTCOMING OF THE STUDY

The most important assumption of the model, and therefore the study, is found that the

industry is the primary arena in which competition occurs and in addition to being

questionable, the boundaries are being blurred. Notwithstanding this, the view of the

industry as being central to competitive strategy remains one that is widely held and

hence, a deliberate attempt was made to define the industry being analysed as accurately

as possible.

Though not a short coming writers are critical of relevance of the Five Forces' as an

analytical tool and its value to business is brought into question. These writers suggest

that the framework works well in conditions of stability or where there is a fair amount of

certainty but not in other situations. However, these writers do not offer any viable

alternative for analysis and it is contended that the Five Forces Model can be successfully

applied to the industry.

Another shortcoming, which Gordon (1997) recognIzes and quotes Porter's

acknowledgement, is that the Five Forces model does not recogmze the role of

government in shaping competition. This is a significant shortcoming; especially in the

presence of the role that legislation is to play in redefining the life and investment

industry in South Africa over the next few months. Such legislation will have a profound

impact on the shape of the industry going into the next few months. Clearly though no

business can operate without taking into account legislation and this is more so in the

financial services sector. In the light of this it is argued that any well run company would

104

consider many factors more that the Five Force Model in its overall business strategy.

This research focussed on the Five Forces Model in order to apply it to the marketing of

life and investment products as it was believed and has been shown that the model could

serve the industry and new entrants as well.

A further criticism, levelled not at the Five Forces' Model itself, but to the way in which

it is used, is that using it assumes to some extent, that the new firm is creating value, with

each force essentially determining how that value is then distributed. It is therefore, in the

case of a new business, to conduct other analyses to determine the extent of the value

being created and therefore, whether to invest in such a business. The argument to that

view is that every firm has to incur some costs on getting products to the market and the

costs of implementing a Five Forces Model should not be onerous at all.

As envisaged throughout this study the model is based on a new firm entering the market

as distributor of life investment products for and on behalf of the established companies.

It was also contended in this study that such a company would have cost benefits to the

consumer and to other related parties.

This work is complete and it is contended that if the proposed model is to implemented

by the players in the industry there should be fewer problems and companies' would have

better client retention strategies without the issues of concentrating on distribution.

105

consider many factors more that the Five Force Model in its overall business strategy.

This research focussed on the Five Forces Model in order to apply it to the marketing of

life and investment products as it was believed and has been shown that the model could

serve the industry and new entrants as well.

A further criticism, levelled not at the Five Forces' Model itself, but to the way in which

it is used, is that using it assumes to some extent, that the new firm is creating value, with

each force essentially determining how that value is then distributed. It is therefore, in the

case of a new business, to conduct other analyses to determine the extent of the value

being created and therefore, whether to invest in such a business. The argument to that

view is that every firm has to incur some costs on getting products to the market and the

costs of implementing a Five Forces Model should not be onerous at all.

As envisaged throughout this study the model is based on a new firm entering the market

as distributor of life investment products for and on behalf of the established companies.

It was also contended in this study that such a company would have cost benefits to the

consumer and to other related parties.

This work is complete and it is contended that if the proposed model is to implemented

by the players in the industry there should be fewer problems and companies' would have

better client retention strategies without the issues of concentrating on distribution.

105

5.10. CLOSING COMMENTS

Various aspects of the life and investment industry have been explored. The researcher

explored the impact a third party distributor would have in this industry, within the

context of Porter's Five Forces Model and suitable recommendations were made. It is

suggested that where recommendations are implemented, benefits such as lower

operating costs, increased client retention, greater focus on product development,

increased profitability, and finally a strong brand will result due to goodwill being

generated and the market share should increase.

In the light of the above this research has covered the ground it was designed to do, and

as the problems have been explored and recommendations made, which if followed

should be of benefit to new entrants to the market and in all probability would be a boon

to existing firms in the market. It can thus safely be said that the research process is

concluded.

This research has shown that there is a gap in the methods of distributing life and

investment products. The fact FinanzPlan is testing the possibilities of a Franchised

Distribution Network bears testament to the fact that there is problem with the manner in

which companies distribute there products.

Further research into the distribution and marketing of Life and Investment products

needs to be undertaken. In the researchers opinion further research needs to conducted

with the pricing models on the distribution networks as a core activity of the life and

investment business.

106

5.10. CLOSING COMMENTS

Various aspects of the life and investment industry have been explored. The researcher

explored the impact a third party distributor would have in this industry, within the

context of Porter's Five Forces Model and suitable recommendations were made. It is

suggested that where recommendations are implemented, benefits such as lower

operating costs, increased client retention, greater focus on product development,

increased profitability, and finally a strong brand will result due to goodwill being

generated and the market share should increase.

In the light of the above this research has covered the ground it was designed to do, and

as the problems have been explored and recommendations made, which if followed

should be of benefit to new entrants to the market and in all probability would be a boon

to existing firms in the market. It can thus safely be said that the research process is

concluded.

This research has shown that there is a gap in the methods of distributing life and

investment products. The fact FinanzPlan is testing the possibilities of a Franchised

Distribution Network bears testament to the fact that there is problem with the manner in

which companies distribute there products.

Further research into the distribution and marketing of Life and Investment products

needs to be undertaken. In the researchers opinion further research needs to conducted

with the pricing models on the distribution networks as a core activity of the life and

investment business.

106

BIBLIOGRAPHY

Abell, D.F., 1980. Defining the Business: The Starting Point of Strategic Planning,

Prentice Hall, New York

Ambrosini, V., 2002. Exploring Techniques of Analysis and Evaluation in Strategic

Management, Prentice-Hall Europe, Hertfordshire.

Baden-Fuller, C and Stopford, J., 1992. The Firm Matter, Not the Industry, Rejuvenating

the Mature Business, Routledge (13-34).

Benetton, N., 2002. Life Assurance: Improved Motivation with Lower Sales Costs - The

Emergence Of Network Marketing in the Field of Financial Services, Insurance Times

and Investments, Aug 2002 (20-22).

Chan Kim, W. and Mauborbne,R., 1999. Creating New Market Space, Harvard Business

Review, Jan-Feb 1999.

Chen, M.J., Competitive Analysis and Interfirm Rivalry: Towards a Theoretical

Integration, The Academy of Management Review, J an 1996 (100-134)

Dake, C.A. and Mayo, B.F., 1996. 1995 Premium Market Share by Distribution Systems

in the United States, LIMRA, Hartford, CT.

107

BIBLIOGRAPHY

Abell, D.F., 1980. Defining the Business: The Starting Point of Strategic Planning,

Prentice Hall, New York

Ambrosini, V., 2002. Exploring Techniques of Analysis and Evaluation in Strategic

Management, Prentice-Hall Europe, Hertfordshire.

Baden-Fuller, C and Stopford, J., 1992. The Firm Matter, Not the Industry, Rejuvenating

the Mature Business, Routledge (13-34).

Benetton, N., 2002. Life Assurance: Improved Motivation with Lower Sales Costs - The

Emergence Of Network Marketing in the Field of Financial Services, Insurance Times

and Investments, Aug 2002 (20-22).

Chan Kim, W. and Mauborbne,R., 1999. Creating New Market Space, Harvard Business

Review, Jan-Feb 1999.

Chen, M.J., Competitive Analysis and Interfirm Rivalry: Towards a Theoretical

Integration, The Academy of Management Review, J an 1996 (100-134)

Dake, C.A. and Mayo, B.F., 1996. 1995 Premium Market Share by Distribution Systems

in the United States, LIMRA, Hartford, CT.

107

Devlin, J.F., 1998. A Multivariate Analysis of Single Competitive Markets in a Services

Environment, Journal of Strategic Management, (47 -63)

Dyer, J.H. Cho, D.S. and Chu, W. 1998 Strategic Supplier Segmentation: The Next "Best

Practice" in Supply Chain Management, California Management Review, Winter 1998

(57 -77)

Dollinger, M.J., 2002. Entrepreneurship strategies and Resources, Austen Press,

Homewood.

FSB Annual Report, 2005, Pretoria.

Geroski, P.A., 1999. Early warnings of New Rivals, Sloan Management Review, Spring

1999 (107 - 115)

Gopalan, R., 2000. Asian Insurers also looking to implement Multiple Distribution

Systems, LIMRA, Hartford, CT.

Hamel, G., Doz, Y. and Prahalad, C.K., 2001 . Collaborate with your Competitors - and

Win, Harvard Business Review, Jan-Feb 2001.

Lorenzoni, G. and Baden-Fuller,C., 1995. Creating a Strategic Centre to Manager a Web

of Partners, California Management Review, Vo1.37, No.3, Spring 1995

108

Devlin, J.F., 1998. A Multivariate Analysis of Single Competitive Markets in a Services

Environment, Journal of Strategic Management, (47 -63)

Dyer, J.H. Cho, D.S. and Chu, W. 1998 Strategic Supplier Segmentation: The Next "Best

Practice" in Supply Chain Management, California Management Review, Winter 1998

(57 -77)

Dollinger, M.J., 2002. Entrepreneurship strategies and Resources, Austen Press,

Homewood.

FSB Annual Report, 2005, Pretoria.

Geroski, P.A., 1999. Early warnings of New Rivals, Sloan Management Review, Spring

1999 (107 - 115)

Gopalan, R., 2000. Asian Insurers also looking to implement Multiple Distribution

Systems, LIMRA, Hartford, CT.

Hamel, G., Doz, Y. and Prahalad, C.K., 2001 . Collaborate with your Competitors - and

Win, Harvard Business Review, Jan-Feb 2001.

Lorenzoni, G. and Baden-Fuller,C., 1995. Creating a Strategic Centre to Manager a Web

of Partners, California Management Review, Vo1.37, No.3, Spring 1995

108

Magretta, J., 2004. The Power of Vertical Integration: An Interview with Dell

Computer's Michael Dell, Harvard Business Review, Mar- April 2004.

Markides, C.C., 1999. A Dynamic View of strategy, Sloan Management Review, Spring

1999 (55-63).

McDonald, F. 1999. The Importance of Power in Partnership Relationships, Journal of

Management Review, Vol. 25, No 1, Autumn 1999 (43 - 59)

Omar, O.E., 1998. Strategic Collaboration: A Beneficial Retail Marketing Strategy for

Car Manufacturers and Dealers, Journal of Strategic Marketing, Vol. 6, No 1, March

1998 ( 65-78).

Pearce, J.A. and Robinson, R.B. , 2003. Competitive Management: Formulation,

Implementation and Control, Irwin McGraw-Hill, United States.

Porter, M.E., 1980. competitive advantage: Techniques for Analysing Industries and

Competitors, Free Press, New York.

Porter, M.E., 1985. Competitive Advantage: Creating and Sustaining Superior

Performance, Free Press, New York.

Van Aartrijk, P., 2000. Men are from Mars, Women from Venus, Independent Mercury,

Insurance Journal (http://www.insurancejournal.com )

109

Magretta, J., 2004. The Power of Vertical Integration: An Interview with Dell

Computer's Michael Dell, Harvard Business Review, Mar- April 2004.

Markides, C.C., 1999. A Dynamic View of strategy, Sloan Management Review, Spring

1999 (55-63).

McDonald, F. 1999. The Importance of Power in Partnership Relationships, Journal of

Management Review, Vol. 25, No 1, Autumn 1999 (43 - 59)

Omar, O.E., 1998. Strategic Collaboration: A Beneficial Retail Marketing Strategy for

Car Manufacturers and Dealers, Journal of Strategic Marketing, Vol. 6, No 1, March

1998 ( 65-78).

Pearce, J.A. and Robinson, R.B. , 2003. Competitive Management: Formulation,

Implementation and Control, Irwin McGraw-Hill, United States.

Porter, M.E., 1980. competitive advantage: Techniques for Analysing Industries and

Competitors, Free Press, New York.

Porter, M.E., 1985. Competitive Advantage: Creating and Sustaining Superior

Performance, Free Press, New York.

Van Aartrijk, P., 2000. Men are from Mars, Women from Venus, Independent Mercury,

Insurance Journal (http://www.insurancejournal.com )

109

INTERNET SOURCES

Internet! http://www.loa.co.za Accessed on 3rd October 2006

Internet 2 http;llwww.lusas.co.za Accessed on 3rd October 2006

Internet 3 http://www.fsb.co.za Accessed on 5th October 2006

Internet 4 http://www.ifa.co.za Accessed on 8th November 2006

Internet 5 http://www.iternationalinsurance.com Accessed on 28th September 2006

Internet 6 http://www.fsb.co.za Accessed on 5th October 2006

Jarillo, J.C., 1988. On Strategic Networks, Strategic Management Journal, June-July

1988.

Johnson, G and Scholes, K., 2003. Exploring Corporate Strategy, Prentice-Hall, Europe

Kotler, P ., 1997. Marketing Management: Analysis, Planning, Implementation and

Contro1,9th Ed., Prentice -Hall, New Jersey.

Leak,R and Van Der Merwe, S., 2004. Competitor Analysis: South African Investment

Products, Metropolitan Life internal document, Cape Town.

110

INTERNET SOURCES

Internet! http://www.loa.co.za Accessed on 3rd October 2006

Internet 2 http;llwww.lusas.co.za Accessed on 3rd October 2006

Internet 3 http://www.fsb.co.za Accessed on 5th October 2006

Internet 4 http://www.ifa.co.za Accessed on 8th November 2006

Internet 5 http://www.iternationalinsurance.com Accessed on 28th September 2006

Internet 6 http://www.fsb.co.za Accessed on 5th October 2006

Jarillo, J.C., 1988. On Strategic Networks, Strategic Management Journal, June-July

1988.

Johnson, G and Scholes, K., 2003. Exploring Corporate Strategy, Prentice-Hall, Europe

Kotler, P ., 1997. Marketing Management: Analysis, Planning, Implementation and

Contro1,9th Ed., Prentice -Hall, New Jersey.

Leak,R and Van Der Merwe, S., 2004. Competitor Analysis: South African Investment

Products, Metropolitan Life internal document, Cape Town.

110

Appendix 1

Re: Research dissertation in partial fulfillment for the degree of Master of Business

Administration

The attached questionnaire seeks to determine the role the brokers and broker managers

play in securing and placing business with life and investments companies that are

licensed as financial services providers in the Republic of South Africa.

Kindly answer the attached questionnaire in an unbiased manner, in order that we arrive

at viable solution to the proposed model that is being envisaged in a study.

Your participation in this study will be treated strictly and your confidentiality will be

maintained throughout.

The study seeks to apply Michael Porter's Five Forces Model of the Industry and

competitor analysis to a firm seeking to operate as an independent third party distributor

of life and investment products with the South African Financial Services framework.

Your participation in this will help in determining whether such a model will have the

impact of changing the manner in which life and investment products will be distributed.

The study would also attempt to demonstrate the cost benefits that life and investment

companies would enjoy, should such model become a reality.

Thank you for your participation in this study.

Kind Regards

Kiru Padayachee

111

Appendix 1

Re: Research dissertation in partial fulfillment for the degree of Master of Business

Administration

The attached questionnaire seeks to determine the role the brokers and broker managers

play in securing and placing business with life and investments companies that are

licensed as financial services providers in the Republic of South Africa.

Kindly answer the attached questionnaire in an unbiased manner, in order that we arrive

at viable solution to the proposed model that is being envisaged in a study.

Your participation in this study will be treated strictly and your confidentiality will be

maintained throughout.

The study seeks to apply Michael Porter's Five Forces Model of the Industry and

competitor analysis to a firm seeking to operate as an independent third party distributor

of life and investment products with the South African Financial Services framework.

Your participation in this will help in determining whether such a model will have the

impact of changing the manner in which life and investment products will be distributed.

The study would also attempt to demonstrate the cost benefits that life and investment

companies would enjoy, should such model become a reality.

Thank you for your participation in this study.

Kind Regards

Kiru Padayachee

111

Supervisor: Alec Bozas : Contact number:27823344477 Student: Kiru Padayachee : Contact number: 27823356661 Student number: 200501188 School: Graduate School of Business UKZN

1. 1.The competencies stated below, is a general list of the activities that a

broker consultant perform in there daily duties. Kindly score the duties as

follows: 25% being LOW; 50% being AVERAGE; 75% being HIGH; 100%

being VERY HIGH.

Interpersonal Skills

Ability to motivate brokers

Problem Solving

Ability to impart Knowledge

Technical Knowledge

Presentation Skills

2. After speaking to broker managers, they have stated that they view the list

below as important, in order to service brokers. Do agree with these and

kindly rate it as follows; 25% low; 50% average; 75% high; 100% very high.

Interpersonal Skills

Ability to motive brokers

Ability to impart knowledge

112

Supervisor: Alec Bozas : Contact number:27823344477 Student: Kiru Padayachee : Contact number: 27823356661 Student number: 200501188 School: Graduate School of Business UKZN

1. 1.The competencies stated below, is a general list of the activities that a

broker consultant perform in there daily duties. Kindly score the duties as

follows: 25% being LOW; 50% being AVERAGE; 75% being HIGH; 100%

being VERY HIGH.

Interpersonal Skills

Ability to motivate brokers

Problem Solving

Ability to impart Knowledge

Technical Knowledge

Presentation Skills

2. After speaking to broker managers, they have stated that they view the list

below as important, in order to service brokers. Do agree with these and

kindly rate it as follows; 25% low; 50% average; 75% high; 100% very high.

Interpersonal Skills

Ability to motive brokers

Ability to impart knowledge

112

Presentation skills

Administrative skills

Technical knowledge

Problem solving

3. What are your views on a third distributor of life and investment products? Do

you think that it would impact on your business negatively or positively?

Comment

4. Will the product or the level service being offered is the key determinant in

deciding on whether to change supplier?

5. Do you thrive on the achievement of targets set by the different life and

investment companies? If yes, kindly elaborate.

113

Presentation skills

Administrative skills

Technical knowledge

Problem solving

3. What are your views on a third distributor of life and investment products? Do

you think that it would impact on your business negatively or positively?

Comment

4. Will the product or the level service being offered is the key determinant in

deciding on whether to change supplier?

5. Do you thrive on the achievement of targets set by the different life and

investment companies? If yes, kindly elaborate.

113

6. Will a single exit distribution model be meaningful to your business? If yes,

kindly elaborate r

7. Is loyalty to any life or investment company a deciding factor in deciding to

change supplier?

8. Will switching costs imposed by suppliers cause you to change suppliers? If

yes, kindly comment

9. Is the knowledge of the broker consultant important in your ongoing

relationship with your product provider?

114

6. Will a single exit distribution model be meaningful to your business? If yes,

kindly elaborate r

7. Is loyalty to any life or investment company a deciding factor in deciding to

change supplier?

8. Will switching costs imposed by suppliers cause you to change suppliers? If

yes, kindly comment

9. Is the knowledge of the broker consultant important in your ongoing

relationship with your product provider?

114

10. Is the product offering of company important to the level of support you given

to a company? Give 2 reasons.

11. What percentage of business is given to the company that gives you the best

service? Give one reason as to why this is the case.

12. Kindly rate the following services as being important to your business. 25%

low; 50% average; 75% high; 100% very high

Personal Contact

Solving Problems

Advice on Business

Motivation

Sales Ideas

115

10. Is the product offering of company important to the level of support you given

to a company? Give 2 reasons.

11. What percentage of business is given to the company that gives you the best

service? Give one reason as to why this is the case.

12. Kindly rate the following services as being important to your business. 25%

low; 50% average; 75% high; 100% very high

Personal Contact

Solving Problems

Advice on Business

Motivation

Sales Ideas

115

Training

Presentations

Counselling

13. Under which circumstance would you change company, if the need arose?

25% low; 50% average; 75% high; 100%very high.

Breakdown in the relation with the BC

Better Product

Breakdown in relationship with Company

Better Technology

116

Training

Presentations

Counselling

13. Under which circumstance would you change company, if the need arose?

25% low; 50% average; 75% high; 100%very high.

Breakdown in the relation with the BC

Better Product

Breakdown in relationship with Company

Better Technology

116

RESEARCH OFFICE (GOVAN MBEKI CENTRE) WESTVILLE CAMPUS TELEPHONE NO.: 031 - 2603587 EMAIL: ximbap@ukzn.ac.2a

27 FEBRUARY 2007

MR. K. PADAYACHEE (200501128) GRADUATE SCHOOL OF BUSINESS

Dear Mr. Padayachee

ETHICAL CLEARANCE APPROVAL NUMBER: HSS/0049/07D

I wish to confirm that ethical clearance has been granted for the f()lIowing project:

~{ .~ •• " ..... ~

b u UNIVERSITY OF

KWAZULU-NATAL

"Porter's Five Forcers model to determine the attractiveness of a third party distributor of life and investment products"

Yours faithfully

MS. PHUMELELE XIMBA RESEARCH OFFICE

cc. Faculty Officer (Christel Haddon) cc. Supervisor (Alec Bozas)

Founding Campuses: - Edgewood - Howard ColI",n ..

RESEARCH OFFICE (GOVAN MBEKI CENTRE) WESTVILLE CAMPUS TELEPHONE NO.: 031 - 2603587 EMAIL: ximbap@ukzn.ac.2a

27 FEBRUARY 2007

MR. K. PADAYACHEE (200501128) GRADUATE SCHOOL OF BUSINESS

Dear Mr. Padayachee

ETHICAL CLEARANCE APPROVAL NUMBER: HSS/0049/07D

I wish to confirm that ethical clearance has been granted for the f()lIowing project:

~{ .~ •• " ..... ~

b u UNIVERSITY OF

KWAZULU-NATAL

"Porter's Five Forcers model to determine the attractiveness of a third party distributor of life and investment products"

Yours faithfully

MS. PHUMELELE XIMBA RESEARCH OFFICE

cc. Faculty Officer (Christel Haddon) cc. Supervisor (Alec Bozas)

Founding Campuses: - Edgewood - Howard ColI",n ..